SIA may resume dividend payout this fiscal year, redeem 2021 bonds

SINGAPORE Airlines (SIA) could resume its dividend payments for its fiscal year to March 2023, analysts said, following the national carrier’s recent announcement that it intends to redeem its zero-coupon mandatory convertible bonds (MCBs) issued in 2020.

Analysts at Citi and DBS also expect the airline to redeem the MCBs issued in 2021 before they mature in 2030.

SIA’s move to redeem the 2020 tranche of MCBs, announced after the market closed on Tuesday (Oct 25), turbocharged the trading prices of both MCB tranches – both gapped up on Wednesday when the market opened.

In a research note on Tuesday night, Citi analyst Kaseedit Choonnawat raised his core earnings forecast for the carrier’s FY2023 to S$1.2 billion, on strong pent-up demand, from an earlier estimate of S$460 million.

His estimates for SIA’s core earnings for FY2024 and FY2025 have been revised to S$1.1 billion and S$1.2 billion, from S$1.5 billion and S$1.1 billion, respectively, as he expects ticket pricing to normalise from FY2024.

With the better profits, Choonnawat expects SIA to resume its dividend payments from FY2023. He estimates the stock would have a dividend yield of 5.6 per cent.

His “neutral” call on the counter was left unchanged, but his target price was lowered to S$5.19, from S$5.79, having taken into consideration the scenario of SIA redeeming the 2021 MCBs as well.

DBS, meanwhile, said in a note to clients that SIA’s calling of its 2020 MCBs at an earlier-than-expected time has substantiated its view of dividend payment resumption in FY2023. It is forecasting dividends of S$0.20 a share, which would work out to a dividend yield of about 4 per cent at the current share price. DBS’ target price is unchanged at S$6.60, with a “buy” recommendation.

With the flag carrier’s cash flows and favourable medium-term prospects, DBS believes SIA could be redeeming the 2021 MCBs as soon as next year or in 2024.

The redemption announcement for the 2020 tranche has fuelled optimism among investors that the 2021 tranche might also be called soon, pushing up the price of the latter from S$0.94 on Tuesday to S$0.97 when the market opened. The MCBs peaked at S$0.99 before slipping back to S$0.987, 5 per cent higher for the day, at the closing bell.

The 2020 MCBs also opened higher, at S$1.088, up 8.8 per cent from the closing price of S$1 on Tuesday. It last traded at S$1.095 – a record high since its listing in June 2020 – when the market closed on Wednesday, up 9.5 per cent.

In fact, the 2020 MCBs had started rising in the last trading hour on Tuesday – even before the SIA announcement – from S$0.983 to S$0.998.

The yield-to-call for the 2020 MCBs is 4 per cent per annum, while that for the 2021 tranche is also 4 per cent if it is redeemed in the first four years. It will be stepped up to 5 per cent per annum between the fifth and seventh year, and 6 per cent beyond that to maturity.

Both bonds also logged higher turnover volumes: an all-time high of 1.3 million for the 2021 issuance and 565,400 for the 2020’s.

SIA said after the market closed on Tuesday that it would be redeeming the 2020 MCBs for S$3.86 billion with existing cash reserves, which have risen in line with the strong recovery in demand for passenger air travel. This would allow it to recalibrate its balance sheet that has been battered by the pandemic as border closures decimated air travel.

The airline did not state, however, when it would redeem its 2021 MCBs in the announcement. It said in a statement in response to queries from The Business Times on Wednesday that it will weigh all options and opportunities against its near-term and long-term funding needs.

The spokesperson added that SIA’s equity will come down by S$3.9 billion with the 2020 MCB redemption. This would lower its cash balance by the same amount, but there is no impact on its profit and loss position.

Shares of SIA closed at S$5.11 on Wednesday, up S$0.08 or 1.6 per cent.