Analysts maintain ‘buy’ on SIA amid weakening cargo market concerns

Russell Marino Soh
Published Tue, Nov 8, 2022 · 11:06 AM

OCBC Investment Research and CGS-CIMB have maintained their “buy” calls on Singapore Airlines : C6L 0% (SIA) with both brokerages adjusting their targets based on growing passenger demand, the airline’s redemption of its mandatory convertible bonds (MCBs), and concerns of a weakening cargo market.

OCBC raised its fair value to S$6.28 from S$5.84 based on a price-to-book value (P/BV) multiple of one time, which is the historical average, to reflect a strong expected recovery in passenger demand.

The research house estimates an earnings per share of S$0.599 for FY2023, and is expecting passenger capacity to increase to about 76 per cent of pre-Covid levels in December 2022 and March 2023.

“In addition, we see tailwinds from the recent relaxation of border controls in parts of East Asia, with demand to pick up in Hong Kong, Taipei and Japan,” said OCBC analyst Chu Peng in a report on Monday (Nov 7).

Meanwhile, CGS-CIMB lowered its target to S$5.97 from S$6.10, based on a lower FY2024 P/BV multiple of 0.9 time to reflect downside risks for the group’s air cargo markets.

While the national airline had posted record operating profits for its second quarter ended Sep 30, the brokerage foresees that rising competition will pose a significant challenge, with South-east Asian carriers starting to redeploy their fleets, and with Cathay Pacific set to deploy more capacity with Hong Kong’s reopening.

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“What is uncertain is how quickly the additional competition could materialise, and how intense the yield pressure may be,” said CGS-CIMB analyst Raymond Yap.

SIA had earlier announced that it would be redeeming its first tranche 10-year MCBs issued in June 2020 for S$3.86 billion. Chu said the earlier-than-expected redemption showcases “the management’s confidence in the airline’s recovery”.

Analysts from both CGS-CIMB and OCBC concurred that a further redemption will take place ahead as the airline seeks to improve its cash position. Yap said that given the expected rise in net debt from FY2023, SIA will be “comfortable to redeem approximately half of its total MCB face value of S$9.7 billion”.

Both research houses are expecting SIA’s revenue from cargo flown to continue its decline, given the impacts of global economic headwinds on consumer demand and the collapse of container freight rates.

As at 10.36 am, shares of SIA were trading 2.4 per cent or S$0.13 lower at S$5.28.

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