Brokers' take: DBS, CGS-CIMB upgrade on SIA as airline set to benefit from global economic recovery

TWO research houses - DBS Group Research and CGS-CIMB Securities Research - have upgraded their target prices for Singapore Airlines (SIA) by at least 13 per cent, following news of a 62 per cent jump to S$286.1 million in net profit that the airline posted for the third quarter.

On Wednesday, DBS issued a "buy" call for SIA, saying that it is "more upbeat on the outlook" for SIA as it stands to benefit from strong travel demand from the synchronised global economic recovery, which "should keep load factors firm and improve passenger yields for its flagship segment".

DBS added that the cargo business should also remain "fairly strong as trade conditions stay fairly buoyant".

Contributions from subsidiaries Silkair and Scoot are also expected to improve as both regional and leisure air travel demand continue to grow.

DBS has pinned S$12 on the stock, a 13 per cent increase from its previous target price.

As at 10.14am, SIA was trading 46 Singapore cents higher at S$11.08.

The target price is based on one-time FY2019 price-to-book value, which is at about its historical mean and reflects the improving return on equity outlook for the company - from less than 3 per cent in FY2017 to 6 per cent by FY2020 forecast, DBS said.

"SIA's share price could rerate if it can demonstrate a sustained improvement in revenues, either from increasing its passenger yield or growing other revenue streams and/or materially lower its operating costs without affecting product quality and revenues," the report said.

While jet fuel prices have increased year-on-year, SIA is in a "better position than most" as it has put in longer-dated Brent hedges with maturities up to financial year ending March 2023, covering up to 47 per cent of the group's projected annual fuel consumption, at an average price ranging from US$53-59 per barrel.

However, with operating margins "razor thin", SIA is vulnerable to any demand shocks and/or a sharp increase in fuel prices.

On Wednesday, CGS-CIMB continued with an "add" call on SIA and increased their target price by 13.5 per cent to S$12.05.

This was based on the continued strength of the cyclical demand environment in the 2018 forecast, the rapid pace of its aircraft renewal and product upgrades in the next few years, and SIA's accelerating efforts at transformation and restructuring.

The downside risks include potentially higher-than-expected jet fuel price as the bank assumed spot jet fuel price to average US$75 per barrel in FY2019 forecast against the spot price of US$76 per barrel on Feb 14, and continued expansion of the Middle East and Chinese carriers on long-haul routes.

On Tuesday, SIA said that its third-quarter profit was given a boost by higher passenger and cargo revenues, as well as from the absence of a write-down that was made in the corresponding period last year.

Operating profit was up S$37 million, and the bottom line was strengthened by the absence of the S$79 million write-down of the Tigerair brand and trademark that was made last year.

Earnings per share for the third quarter stood at 24.20 Singapore cents, up from 15 cents a year ago.

Revenue increased about 6 per cent to S$4.08 billion as all of its business segments - passenger, cargo and engineering services - posted higher revenues.