Brokers’ take: UOBKH downgrades SIA to ‘sell’, lowers target after Q3 earnings miss
Chelsea Ong
UOB Kay Hian (UOBKH) has downgraded its call on Singapore Airlines (SIA) to “sell”, with the view that it is time to take profit, as it foresees a slowdown in the flag carrier’s growth momentum.
The research house has lowered its target price to S$5.35 from S$5.40 as it believes valuations are now “stretched”, with the stock trading about 1.9 standard deviation points (SD) above its historical mean before the pandemic.
The new target price is based on 1.06 times the research house’s FY2024 estimates, which is 1SD above the stock’s historical mean.
UOBKH’s downgrade comes after the flag carrier’s net profit for the third quarter ended Dec 31, 2022, missed the research house’s expectations, mainly due to a significant forex loss.
On Thursday (Feb 23), analyst Roy Chen noted that even excluding the forex loss, SIA’s net profit would still have been at the lower end of UOBKH’s forecasted range.
He also highlighted slower cargo demand during a quarter that should have been seasonally strong, resulting in a quarter-on-quarter decline in cargo yields.
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To reflect the results miss, the research house reduced the company’s FY2023 net profit forecast by 5.6 per cent to S$2.2 billion. However, it largely maintained its FY2024 and FY2025 net profit forecasts.
In Chen’s view, SIA’s core profitability is likely to have peaked in the third quarter of FY2023. Though the analyst expects an eventual recovery in passenger volume, he cautioned that this may not reverse the negative impacts from declining passenger and cargo yields, as well as slower cargo volume.
However, he highlighted the possibility of the company’s headline net profit improving on a quarter-on-quarter basis in Q4.
While SIA’s management guided for passenger capacity to recover to about 77 per cent of pre-pandemic levels in the fourth quarter, the analyst believes this guidance “appears conservative”, given that February has fewer days than the pre-pandemic base month of January 2020.
The guidance also did not include some of the China routes, with their reactivation still pending approvals from the Chinese authorities, he added.
Chen also noted that SIA still held a healthy balance sheet, with its “abundant liquidity” offering the company flexibility to redeem its remaining mandatory convertible bonds early.
Shares of SIA were up 1.2 per cent or S$0.07 at S$5.84 as at 10.27 am on Thursday.
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