OCBC turns positive on aviation but maintains 'sell' on SIA

Singapore

OCBC Investment Research has turned more positive on the aviation sector given recent progress on Covid-19 vaccines and easing travel restrictions, which fuel the research house's expectations of a gradual recovery in 2021.

In a Thursday report, analyst Chu Peng said she believes the recovery, which is expected to be particularly strong in the second half of the year, will be led by leisure travel due to strong pent-up demand. This is assuming successful vaccines roll out as well as less strict travel restrictions by mid-2021.

Domestic travel is likely to lead the recovery while international travel will take a longer time to recover due to headwinds from border controls and travel restrictions, said the analyst.

OCBC's more positive outlook for the aviation sector comes despite the International Air Transport Association's (Iata) projected industry net loss of US$38.7 billion in 2021, up from its initial forecast of US$15.8 billion. While passenger numbers are expected to grow 56 per cent year on year to 2.8 billion passengers this year, it is still down 62 per cent as compared to the 2019 levels, noted Ms Chu.

Iata estimates the global airline industry to have lost US$118.5 billion in 2020, wider than its initial projected net loss of US$84.3 billion.

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In her report, Ms Chu notes that global passenger traffic, measured by revenue passenger kilometers, is not expected to return to pre-Covid-19 levels until 2024 at the earliest. Weak consumer sentiment amid economic weakness and rising unemployment will also limit people's ability to travel, she added.

Ms Chu maintains her "sell" call on Singapore Airlines (SIA) with a fair value estimate of S$3.70.

The analyst highlights that while the flagship carrier's Dec 2020 operating statistics showed improvement from trough levels, they remained sluggish due to weak international travel demand.

SIA is nonetheless expecting passenger capacity to reach 25 per cent of pre-pandemic levels, and resume 45 per cent of its network by March 2021. This is given recent positive developments on Covid-19 vaccines, which Ms Chu expects the airline to benefit from in tandem with Singapore's progressive re-opening.

"SIA's share price rallied over 24 per cent over the past three months and is currently trading at 1.7 times standard deviation above its historical five years mean of 0.88 times price-to-book," said Ms Chu.

"While we believe SIA could benefit from Singapore's progressive re-opening and the roll-out of vaccines in 2021, there could be risk of potential share dilution. The company will be issuing an earnings update in Feb," she added.

SIA last month disclosed it had used about S$7.1 billion of the S$8.8 billion it raised from a rights issue in June 2020. The airline has an option to raise another S$6.2 billion in additional mandatory converted bonds.

It recently raised US$500 million via its first US dollar-denominated bond issue which was oversubscribed with final demand tallying at more than US$2.85 billion, said the carrier on Thursday.

SIA shares closed up S$0.04 at S$4.39 on Monday.