Brokers’ take: Citi upgrades SIA to ‘neutral’ on stronger-than-expected outlook

CITI has upgraded Singapore Airlines (SIA) to “neutral” from “sell” on a stronger-than-expected outlook, noting that it is likely “behind the curve” on the upgrade.

It also raised the counter’s target price to S$5.79 from S$4.30, implying a potential upside of 5.3 per cent from SIA’s Monday trading price of S$5.50 as at 3.44 pm. The counter was up S$0.02 or 0.4 per cent at the time.

The research team noted that the airline’s recovery prospects have already been reflected in SIA’s share price, according to a report dated May 23.

The S$5.79 target price is 1.35 times the brokerage’s book value estimates for FY2024, in relation to a 12 per cent prospective core return on equity (ROE).

Citi raised its FY2023 core earnings estimates to S$458 million from S$184 million and increased its projections for FY2024 (where full recovery is expected) by 15 per cent to S$1.5 billion.

Citi noted that its S$1.5 billion core profit estimate for FY2024 is the highest since FY2008 – the period when low-cost carriers and Gulf carriers were in their respective setting-up and intermediate phases.

The research team projects SIA’s gross capital expenditure to be at S$3.2 billion on average over FY2023-2025, lower than SIA’s guide of S$4.2 billion which factors in 777x deliveries from FY2024.

The national carrier’s management guidance at the FY2022 results briefing had also exceeded Citi’s expectations. The research team holds the view that the rise in corporate travellers will bring up traffic gains to Changi and SIA.

It also believes that SIA will raise unit revenue or pricing power by passing on the cost of rising costs to consumers. If costs drop, this will strengthen returns.

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Citi is also predicting that SIA will call back its outstanding mandatory convertible bonds (MCBs) in FY2023, which will limit dilution and push up core ROE.