Good quarterly profit, but below expectations
- 3QFY3/24 core net profit of S$628m was below our 9 Jan preview of S$800m as cargo yields failed to materially rise qoq as we had expected.
- We cut our earnings estimates to reflect this, and downgrade from Add to Hold as SIA’s share price has risen strongly over the past three months.
- Our TP is raised to S$7.30, based on SIA’s 2023 peak P/BV multiple of 1.3x, up from 1.2x previously (2 s.d. above P/BV mean since 2011).
SIA’s cargo yields did not track the Baltic Index upwards
Singapore Airlines’ (SIA) 3QFY3/24 core net profit of S$628m was down 3.2% qoq, contrary to our forecast of a qoq increase. Passenger ASK, RPK, yield and RASK metrics were stronger qoq due to the year-end peak travel season, closely hewing to our expectations. But cargo yields in the Oct-Dec 2023 quarter only rose 2.8% qoq, although the Baltic Exchange Air Freight Index (BEAFI), which tracks cargo yields between HK and Europe/US, rose 30% qoq. This dichotomy was the main reason why our 3Q preview was not met. SIA’s post-results analyst briefing tomorrow morning may shed light on the reason for the weak qoq cargo yield growth. Another reason for the core net profit shortfall was a 10.5% qoq increase in non-fuel costs per ATK capacity, which may also be somewhat related to the peak travel season. With 3QFY24 core net profit below our expectations, and given that the Jan-Mar period traditionally sees weaker passenger and cargo demand compared to the immediately preceding Oct-Dec period, we cut our FY24F core earnings forecast by 9% with a downward cargo yield adjustment and a minor upward revision to jet fuel price forecasts, given that spot fuel prices have been rising of late.
Bloomberg consensus’ expectations may have run ahead of reality
In its results release, SIA guided for demand for air travel to remain healthy in 4QFY24F and 1QFY25F, stating that “forward sales continue to be robust, in line with capacity increases in most markets, supported by the demand for leisure travel through the school holidays and Easter peak in Mar and Apr 2024F.” This suggests that passenger load factors would continue to sustain at high levels in the near term, not least supported by key events in Singapore, such as the Singapore Airshow in Feb and the Taylor Swift concerts in Mar. However, we think that these positives have been well reflected in its share price, and the street may have run ahead of what SIA can reasonably deliver. Bloomberg consensus is forecasting FY24F PATAMI of S$3.15bn, and our forecast of S$2.7bn is 16% lower. SIA has guided for passenger yield normalisation to continue as its competitors gradually restore their flight capacities. SQ and TR pax yields have been falling yoy for at least the past three quarters, and we have assumed continued moderation in the forecast period. Meanwhile, cargo yields have been falling yoy for the past five quarters; while 3QFY24 cargo yields remain 33% higher than the pre-Covid 3QFY20, they are now 51% lower than the 3QFY22 peak. Hence, we downgrade to Hold. Upside risks: higher-than-expected final DPS (we have assumed 38 Scts); better-than-expected PLF and passenger yields. Downside risks: rising competition and pressure on both passenger and cargo yield; rising oil prices on worsening geopolitical risks
