Brokers’ take: UOBKH downgrades SIA to ‘sell’ despite raising target price on higher valuation

UOB Kay Hian (UOBKH) has downgraded its call on Singapore Airlines (SIA) from “hold” to “sell” while cautioning that the stock’s “very lofty” valuation may not be sustainable in the long run. 

In a report released on Monday (Jun 19), analyst Roy Chen said SIA’s valuations are now “very stretched” with the stock trading at 1.58 times price-to-book (PB) ratio for FY2024 estimates, which is pegged at 2.8 standard deviation above SIA’s long historical mean of 1.08 times since 2005.

This current PB ratio of 1.58 times has not been seen for the last 10 years, but matches SIA’s historical high in October 2007 prior to the global financial crisis, observed Chen. 

He also noted that SIA’s share price recently rose 31.6 per cent following the release of its FY2023 results.

In Chen’s view, some regional fund flows from the three major Chinese airlines have also contributed to the airline’s recent share price surge.

Despite the downgrade to “sell”, UOBKH’s target price for SIA has been raised to S$7.07 from S$5.75 as Chen expects earnings growth from the airline to continue, albeit at a slower pace.

The new target price is based on 1.44 times PB ratio for FY2024 estimates, which is pegged at two standard deviation above SIA’s historical mean. 

Chen added that even though SIA’s profitability could slow in FY2024 due to declining cargo yields, weaker cargo volume and moderated passenger yields, he believes overall core earnings could still be sustained with stronger-than-expected operational data.

Chen forecasts SIA’s Q1 2024 net profit to hit the range of S$600 million to S$700 million, compared to the net profit of S$602 million in Q4 2023 and S$370 million in the corresponding period last year.

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Although a potentially weaker macroeconomic environment may dampen air travel and cargo demand, Chen believes the group’s near-term bottomline would continue to be supported by a slower-than-expected catch up by SIA’s regional competitors, as well as lower jet fuel prices. 

Other factors that may have contributed to SIA’s earnings include SIA’s branding, strong management track record and operational excellence, said Chen. UOBKH also feels that Singapore’s handling of the pandemic has led to greater recognition by the global community and an influx of wealth from the region into Singapore, which ultimately benefits SIA.

The analyst is raising his forecasts of SIA’s net profit by 10 per cent to S$2.87 billion in FY2024; 31 per cent to S$1.24 billion in FY2025; and 10 per cent to S$1.04 billion for FY2026. 

His FY2024 estimate has also taken into account the one-off accounting gain of S$1.11 billion from the Air India-Vistara merger. 

Shares of SIA were 1.4 per cent or S$0.11 lower at S$7.66 as at the midday trading break.