Brokers’ take: Analysts cut SIA targets on fuel cost concerns; valuations reasonable

SEVERAL analysts have reduced their target prices for Singapore Airlines (SIA) following the airline’s results for the first half ended September, as they believe growth could peak in the coming year as international flight capacity continues to recover.

Rising fuel costs could also eat into earnings in coming quarters, even as revenue dynamics of its passenger airline business remain robust in the next six months, CGS-CIMB said in a report on Wednesday (Nov 8).

The research team reiterated its “reduce” call on the counter and cut its target price to S$5.47 from S$5.66. It now values SIA at 1.15 times its book value, up from 0.91 times previously.

Its new target implies a potential downside of 12.9 from the national carrier’s closing price of S$6.28 on Thursday, when SIA finished flat at market close.

UOB Kay Hian (UOBKH), however, is more optimistic. It upgraded its recommendation on the national carrier to “hold” with a higher target of S$6.80 from S$6.44 in a separate report on Thursday.

The research team noted that since its downgrade in June, SIA’s share price has corrected by almost 20 per cent, and its valuation is more benign now at current prices.

Both Nomura and OCBC Investment Research have a “buy” recommendation on SIA. Out of the research teams, Nomura was the most optimistic over SIA’s future share price performance. It has a target price of S$9.17, implying a potential upside of 46 per cent.

It noted that the stock currently trades at 6.8 times its earnings estimates for FY2024 and offers an attractive FY2024 dividend yield of 5.8 per cent.

Despite maintaining “buy”, OCBC reduced its fair value estimate on the counter to S$7.29 from S$7.81 after making minor adjustments to its forecast. The research team viewed SIA’s valuations as reasonable.

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It remains confident in the group’s network and fleet development strategies but warned that yields could come under some pressure as international flight capacity continues to recover.

This means performance could peak in FY2024, following excellent results for the rest of FY2023, OCBC noted in its report on Wednesday.

Like OCBC, Phillips Securities lowered its target price on SIA to S$5.45 from S$6.80 and maintained its “reduce” call on the counter.

Its lower target took into account an ex-growth operating environment with yields and loads coming under pressure from increased competition and fading travel demand.

Looking ahead, UOBKH believes capacity supply-demand dynamics may stay tight for longer, which could lead to a slower rate of moderation of passenger yields, as delays in new aircraft deliveries and geared turbofan engine issues could limit the aviation sector’s capacity growth.