Broker's take: UOB Kay Hian recommends profit-taking on SIA, downgrades to 'sell'

UOB Kay Hian has downgraded Singapore Airlines (SIA) to "sell" from "buy" and lowered its target price to S$3.80 from S$4.35. It also recommended taking profit on the national carrier.

As at 1.07pm on Thursday, SIA shares were trading at S$4.09, down S$0.04 or 1 per cent.

UOB Kay Hian analyst K Ajith said in a research note on Thursday that there is significant uncertainty over the extent of the decline in traffic and load factors and consequently, the extent of cash burn.

The brokerage has raised its year-on-year traffic decline estimate to 58 per cent from 45 per cent. It has also increased its fiscal 2021 net loss estimate for SIA to S$1.64 billion from S$1.26 billion.

Although flight frequencies and the number of destinations are expected to go up in June and July, Mr Ajith said there is "no reason to cheer" as Singapore's borders are effectively closed, with mandatory Covid-19 testing and stay-home notices for returning travellers.

"We also believe that border restrictions will only be gradually opened and will focus on 'travel bubbles' corridors in Australia and parts of South-east Asia," he added.

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Moreover, fears of a new Covid-19 outbreak in Beijing could dampen "nascent recovery" in China's domestic sector, delaying a much-needed recovery in outbound traffic.

The report also noted that unless SIA defers some of its aircraft deliveries, it will likely require further funding in fiscal 2022.

"SIA has to push back scheduled pre-delivery payments or else the S$8.8 billion in rights and mandatory convertible bonds proceeds might run out by end-FY2022," Mr Ajith said.

However, airline manufacturers are reluctant to delay deliveries and have threatened lawsuits on some airline customers, highlighting immense pressure airlines face due to large capital expenditures (capex) and a dearth of cash flow.

SIA had earlier guided for S$11 billion in capex for FY2021-2022. UOB Kay Hian is estimating the carrier would have S$4 billion in debt and lease repayment due by FY2022.