Brokers’ take: CGS-CIMB expects oil price rally to eat into SIA’s earnings, cuts target price by 16.5%

CGS-CIMB has cut its target price on Singapore Airlines (SIA) by 16.5 per cent to S$5.66 from S$6.78, as it expects the recent rally in oil prices to weigh on the national carrier’s earnings.

The research team reiterated its “reduce” call on the counter, which was trading 1.6 per cent or S$0.10 lower at S$6.18 as at 1.51 pm on Wednesday (Oct 18).

It reduced its target price as it believes higher oil prices could threaten its FY2024-26 earnings per share estimates. The new target price is based on a price-to-book value ratio of 0.91 time, lower than the previous ratio of 1.12 times.

Oil prices have rallied since Saudi Arabia said it would extend its voluntary oil production cut of one million barrels per day (bpd) until the end of December 2023. Russia had also rolled out export cuts of between 300,000 bpd and 500,000 bpd until the end of the year.

The Israel-Hamas conflict also contributed to the oil price rally, due to fears of a wider conflagration that may involve Iran, another major oil producer, the research team said.

Although SIA has hedged about 39 per cent of its fuel requirements for the July 2023 to March 2024 period, any further rally in oil prices from export cuts and geopolitical risks could raise its operating costs in the months ahead.

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On top of rising fuel prices, CGS-CIMB believes that SIA’s profit after taxation and minority interest likely peaked in the first quarter ended Jun 30, and will most likely trend lower in the second quarter. SIA is due to release its Q2 financial results on Nov 7.

The expected downtrend in profit comes amid sequentially higher oil prices, lower passenger yields and a drop in cargo yields, partially offset by a 5.5 per cent on-quarter growth in revenue passenger kilometres for both SIA and budget carrier Scoot.

Both airlines raised their flight capacities and sustained passenger load factors at high levels, CGS-CIMB noted. It also projects an 8.9 per cent quarter-on-quarter rise in revenue freight tonne kilometres cargo demand, attributed to a technical rebound from “very low” levels of air freight demand in H1 2023.