Broker's take: DBS downgrades SIA to 'hold' on capacity cuts, fuel hedging

DBS Group Research has downgraded Singapore Airlines (SIA) to "hold", and reduced its 12-month target price to S$6.60 from S$10.40, it said on Thursday.

SIA shares were down S$0.28 or 4.3 per cent to S$6.25 as at 10.15am.

DBS analyst Paul Yong cited SIA's deep cuts in passenger capacity and its extensive jet fuel hedging programme as key negatives for the airline ahead of a challenging few months due to the coronavirus pandemic.

These factors led DBS to project the lowest estimates on the street, it said.

DBS projected SIA to record a S$1.26 billion loss in earnings before interest and taxes for fiscal 2021, and a 25 per cent decline in revenue year on year.

SIA on Wednesday suspended additional services, which means it will operate at 50 per cent of its capacity that had originally been scheduled up to end-April.

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SIA now has more fuel volume hedged than it will consume in the next few months and is effectively long on oil price for the next two quarters, said Mr Yong.

Oil prices are likely stay low in the months ahead, which will lead to substantial fuel hedging losses for SIA, he added.