Limited upside as earnings peak
- FY24F is likely to be another record year, but capacity growth will likely be inadequate to fully offset lower unit revenue in FY25/26F
- Lift FY24/25F earnings by 11/18% on expectations of slightly softer but more resilient passenger yields
- Valuations in line with fundamentals, as we expect SIA’s earnings to moderate in the next two years
- Maintain HOLD with revised TP of S$7.00
Our 2024 outlook report for the airlines sector highlights that macroeconomic indicators still largely favour the sector, though we expect to see diverging earnings outlook across regions and business segments. This underpins our expectation of global passenger traffic hitting 105-110%/115-120% of 2019’s level in 4Q24/4Q25. Across the three major regions, we are most positive on airlines in Asia Pacific, as we expect them to demonstrate stronger earnings momentum, underpinned by relatively higher capacity growth and wider margins, with the Chinese airlines are likely to see the biggest upswing in earnings. While valuation multiples for Asian airlines might appear high, they are commensurate with the region’s stronger earnings potential. Our top picks are Cathay Pacific (CX) and China Southern Airlines (CSA).
We expect some downward pressure on SIA’s earnings as supernormal passenger yields revert to more normalised levels, though we now believe it will be more gradual than initially anticipated, as well as capacity growth that will be inadequate to fully offset lower unit revenue. With SIA’s capacity already restored significantly at c.93% of pre-COVID19 levels, the group faces constraints in increasing capacity further and has lesser scope to drive unit costs down.
Maintain HOLD for SIA with revised TP of S$7.00 as we roll over our valuations, with valuation peg of 5.1x (one standard deviation below five-year pre-pandemic average) blended FY24/25F EBITDA (previous: blended FY23F/24F EBITDA).
