Brokers’ take: DBS downgrades SIA to ‘hold’ on expected earnings slowdown
Samuel Oh
DBS Group Research has downgraded its call on Singapore Airlines (SIA) from “buy” to “hold”. Although it remains optimistic of the national carrier’s near-term outlook, it believes earnings will peak in FY2024, it said in a Monday (Jun 26) report.
In a separate sector report, the research team has recommended investors “rotate into other parts of the aviation value chain” and switch to ST Engineering or Sats .
DBS noted that SIA’s promising earnings outlook has been “aptly baked” into its valuation.
The research team’s target price for SIA remains unchanged at S$6.80, implying a downside of 9.9 per cent from the counter’s trading price of S$7.55 as at the midday trading break. Shares of SIA were up 0.9 per cent or S$0.07 at the time.
This target price is based on an enterprise value over earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) ratio of 5.1 times for FY2024/2025, which is 0.55 standard deviation above SIA’s five-year pre-pandemic average.
This reflects an “imminent decline” in SIA’s estimated FY2025 earnings, said DBS analysts Jason Sum, Tabitha Foo and Paul Yong.
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Even as travel picks up and capacity growth by competitors remains measured, the “supernormal” passenger yield growth seen by SIA so far could moderate on the back of stiffer competition in the region.
On top of passenger yields falling to a more “normalised” level, there is more pressure on the airline from the air cargo rates and air cargo loading segments, DBS said. It also warned that SIA may suffer greater losses from associates after Air India becomes an associate.
With all these factors coming into play, the analysts believe it is time for investors to take profit on SIA.
Furthermore, with the aviation sector progressing well against expectations in the Asia-Pacific region, DBS recommends ST Engineering’s and Sats’ stocks as they offer “sustained growth and a more favourable risk-to-reward profile”.
ST Engineering is DBS’ top pick at this juncture, given its strong medium-term growth projection. DBS expects a compound annual growth rate of 15.5 per cent over SIA’s FY2022 to FY2024 estimated earnings. Its target price on the counter stands at S$4.20.
As the MRO segment is expected to see strong demand in maintenance, repair and overhaul works over the next few years, DBS believes ST Engineering’s stock will see more upside as its valuation has yet to reflect the multiple growth levers that the industry is experiencing.
The analysts also favour Sats as an attractive option, as its current valuation is not indicative of its long-term earnings capability and the majority of downside risks are already factored in its valuation. It has a S$3.20 target on the stock.
They maintained that although air cargo volumes remained soft in 2023 year to date, the segment could see a turnaround by the later part of the year and Sats could stand to gain.
The strong rebound in air travel also helped Sats in its ground-handling and aviation food business, although a lack of near-term catalysts could delay its rerating until later, said DBS.
ST Engineering shares were trading 1.4 per cent or S$0.05 higher at S$3.63, and Sats was up 1.2 per cent or S$0.03 to S$2.59 as at the midday trading break.
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