Brokers’ take: DBS upgrades SIA to ‘buy’ on faster-than-expected recovery

PASSENGER traffic of Singapore Airlines : C6L 0% (SIA) will likely recover faster than anticipated, as reopening in the Asia-Pacific region continues to pick up momentum, said DBS Group Research.

In a report on Tuesday (May 17), the research team upgraded its call on the Singapore flag carrier to “buy” from “hold”, and raised its target price to S$6.20 from S$4.90, after raising its net profit estimates.

While SIA’s valuations are above its historical mean, DBS noted that it is still cheaper than competitors in the region, adding that SIA’s relatively promising recovery trajectory and medium-term outlook should justify a multiple on par with peers.

Shares of SIA were trading at S$5.24 at 10.57 am on Tuesday, up S$0.08 or 1.6 per cent.

DBS expects SIA will continue to outperform its competitors in the region as Singapore is at the forefront in reopening, with the airline already outperforming peers since Singapore opened its first vaccinated travel lane in September 2021.

The imminent reopening of Japan – an important market for both inbound and outbound travel in Singapore – should also drive a meaningful rebound in inter-region travel for SIA.

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The research team expects SIA’s passenger volumes will reach 70 per cent of pre-pandemic levels by the end of FY2023, and 96 per cent by the end of FY2024.

Meanwhile, passenger yields could stay at elevated levels in FY2023 before moderating closer to pre-pandemic levels in FY2024 amid immense pent-up travel demand.

Sustained demand should also support air fares at above pre-Covid-19 levels, although flight prices will likely moderate as airlines in the region add more capacity.

While the greater China market – which accounted for up to 20 per cent of SIA’s passenger revenue in 2019 – will likely remain closed until 2023, DBS expects SIA can mitigate this drag by re-routing flights to markets where competitors have pulled back.

It noted that many troubled airlines in the region have downsized their fleets substantially and may hold back on growing their fleets over the medium term, as they focus on repairing their balance sheets amid rising interest rates.

Compared to competitors in the region, SIA is likely to be in a stronger position to grow its fleet due to its lower financial leverage and significantly competitive cost of funding, the research team said.

As for air freight rates, DBS expects it will remain strong for the rest of 2022 amid disruptions from the Ukraine conflict and a cargo demand recovery when factories resume production in China.

Additionally, the research team expects SIA will be less hit by the inflationary environment than its peers because of its fuel hedging position and cost transformation efforts.