Brokers’ take: CGS-CIMB downgrades SIA to ‘hold’ on share price rerating

CGS-CIMB has downgraded its call on Singapore Airlines : C6L 0% (SIA) to “hold” from “add” as the brokerage no longer views the national carrier’s upside as compelling despite its strong dividends. 

In a report on Monday (Jan 16), analyst Raymond Yap noted that SIA’s share price has rerated 16.5 per cent over the past three months on optimism over China’s reopening. 

He added that despite SIA’s share price rally over the past week, as well as expectations of the company to deliver a “decent” return of 6.5 per cent, its current level is no longer above CGS-CIMB’s 10 per cent threshold for an “add” recommendation. 

The brokerage’s price target on the stock remains unchanged at S$5.97. 

Yap suggested that investors lighten their positions on the mainboard-listed airline, especially should the share price run up further in anticipation of strong Q3 FY2023 results, considering the likelihood of high passenger airline demand and moderation in jet fuel prices.

The analyst projected SIA’s earnings to normalise post-pandemic, and added that he deems the target price-to-book value ratio (P/BV) of 0.9 times “appropriate”. This has been SIA’s mean P/BV since 2011. 

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Ahead of SIA’s Q3 FY2023 earnings announcement, Yap also raised revenue passenger kilometres demand forecast by 4 per cent. 

He noted that CGS-CIMB’s previous expectations are likely to be exceeded due to both higher-than-expected available seat kilometres capacity and passenger load factor, based on SIA’s operating statistics in October and November 2022.

The brokerage has also slashed all-in jet fuel price assumptions for FY2023 to FY2025 due to lower Brent crude oil price assumptions and lower jet-fuel-to Brent crack spread assumptions.

In the light of a likely global slowdown which could also impact cargo yields, Yap is also expecting the airline to experience lower revenue tonne kilometre demand as well as reduced cargo yield. 

At the same time, the analyst sees China’s reopening as a “double-edged sword” for SIA. 

While the national carrier and its sister airline Scoot stand to benefit from a recovery in inbound and outbound passenger flows, Yap said growing competition with Chinese and Hong Kong carriers may force SIA to give up its unsustainably fat yield premiums.

“Upside risks include potential for the Chinese passenger traffic recovery to exceed expectations due to a tsunami of revenge travel,” he added.

As at 10.38 am, SIA’s shares rose 1.5 per cent or 0.09 to S$5.95.