Brokers’ take: OCBC raises SIA’s fair value to S$7.94 on robust travel demand
While OCBC remains positive on SIA’s prospects, it cautions that much of the airline’s recovery has already been priced in due to its first-mover advantage
Samuel Oh
OCBC Investment Research on Wednesday (Jun 14) increased its fair value estimate on Singapore Airlines (SIA) to S$7.94 to factor in the robust travel demand in the near term.
The move comes more than a week after the research team raised its fair value on the national carrier to S$7.18. It has retained its “hold” rating on the stock as it believes the group’s risk-reward profile has “become more balanced”.
While OCBC remains positive on SIA’s prospects, it cautions that much of the airline’s recovery has already been priced in due to its first-mover advantage.
The airline’s share price has rallied about 33 per cent year-to-date, and in analyst Ada Lim’s view, looks “frothy at these levels” and needs “further catalysts to justify the magnitude of the recent rally”.
She also expects SIA’s share price to remain on a “choppy uptrend” until the ex-dividend date on Aug 1. SIA’s shares were trading 2.9 per cent or S$0.22 higher at S$7.82 as at 12.18 pm.
OCBC’s new fair value takes into account the S$1.1 billion worth of non-cash accounting gains from the recent merger between Vistara and Air India – expected to be completed in the fourth quarter of 2024.
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The research team also assumed that SIA will redeem more of its mandatory convertible bonds.
It has a target price-to-book ratio of 1.15 times on the counter, which is one standard deviation above SIA’s five-year historical average of 0.98 times, bringing it closer to the consensus estimates of 1.3 times.
Lim believes that SIA continues to hold value in existing investors’ portfolios as a play on the global hospitality sector’s recovery, as well as the current upcycle observed in the aviation sector.
She also sees the sustained travel demand to be supported by potential upside from elevated flight ticket prices, the peak travel season in the northern hemisphere and “a more meaningful recovery” in outbound travel from China in the second half of 2023.
Furthermore, SIA intends to increase its capacity further to around 90 per cent of pre-Covid levels by the end of FY2024, due to strong forward passenger sales across all cabin classes, Lim added.
That being said, SIA’s operating environment is becoming more competitive and a recessionary outlook may affect discretionary travel expenditure. However, the airline’s commitment to service quality could differentiate it from competitors and defend its market share.
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