Brokers’ take: CGS-CIMB lowers SIA target price on rising fuel costs risk

WHILE Singapore Airlines (SIA) is in a “very strong revenue position” boosted by high airfares, elevated market share and strong demand, this is tempered by risks of high oil prices, said CGS-CIMB. 

In a report on Tuesday (Jun 14), CGS-CIMB analyst Raymond Yap lowered his target price for the Singapore flag carrier to S$5.75 from S$5.92, though he still maintains a “hold” position on the index counter. 

The new target price is based on a lower FY2023 price-to-book value (P/BV) of 0.95 times and a cut in earnings per share (EPS) estimates for FY2023 and FY2024 by 7 to 15 per cent. 

Shares of SIA were trading at S$5.14 at 12.09 pm on Tuesday, down S$0.04 or 0.8 per cent.

Noting that SIA’s revenue momentum is “solid”, Yap expects that high airfares will carry through from June to August 2022 with demand recovering “strongly”. 

However, Yap is cautious of potential headwinds including high jet fuel costs and cost-of-living inflation, with global recession being a “rising possibility”. He noted this may lead to a fall in consumer spending and discretionary travel demand. 

“As SIA’s competitors ramp up their capacity deployment in the future, SIA’s heightened market share could fall back down to 2019 averages. This may cause the current high airfares to moderate, even if jet fuel price levels remain elevated,” the analyst said.

Yap added that high oil prices posed downside risks to EPS estimates. In his report, he raised his spot jet fuel price assumption for FY2023 from US$120 per barrel (bbl) to US$135/bbl and from US$95/bbl to US$110/bbl for FY2024, which is still below the prevailing price of jet fuel at US$163/bbl.

However, the analyst raised his EPS estimates for FY2025 by 27 per cent as he lifted his “excessively bearish yield forecasts” in light of higher oil prices.

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Additionally, Yap expects SIA to redeem half of its mandatory convertible bonds (MCB) within the next 2 to 3 years as he believes it is holding “too much cash” with a net debt position of only 8.5 per cent as at Mar 31, 2022 compared to 32 per cent as at Dec 31, 2020.    

“Redeeming part of the MCBs will reduce SIA’s shareholders’ equity and make SIA’s P/BV valuations look more expensive, which is another downside risk factor for investors to consider,” added the analyst.