SIA expected to seek external funding; FY21 could see S$1.3b loss as Covid-19 kills off air travel

Singapore

WITH travel demand drying up after fresh travel restrictions and huge fuel hedging losses looming, OCBC Credit Research has again lowered its credit rating for Singapore Airlines (SIA) while DBS Group Research on Thursday downgraded the counter and slashed its target price to S$6.60.

Lowering its issuer profile from Neutral (4) to Neutral (5), OCBC credit analysts Ezien Hoo and Wong Hong Wei wrote: "Marginal revenues amidst fixed costs, compounded by possible margin calls on SIA's fuel hedging position, is likely to lead to internal liquidity being stretched going into Q1FY2021. We think SIA will need to seek external financial funding, either from its banking relationships or possibly from its major shareholder(s)." At this point, the analysts have not factored in state support.

In Q3FY20, SIA earned revenues of nearly S$4.5 billion, while cash expenses (excluding depreciation, amortisation and impairments) totalled S$3.5 billion, the OCBC analysts estimated.

And with revenue to drop in February and March, an operating loss is more or less certain for the fourth quarter ended March 31, 2020.

Nonetheless, investors who already have SIA bonds would be better off holding onto them if they can as opposed to selling at fire sale prices, the OCBC analysts advised.

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OCBC last downgraded its issuer profile from Neutral (3) on March 2. Issuer profile ratings range from one to seven, with scores of six and seven being negative.

Meanwhile, DBS analyst Paul Yong downgraded SIA to "hold", projecting SIA will book a loss of S$1.3 billion in FY21 - its first full-year loss - on the back of weak revenues and significant fuel hedging losses.

He estimates big cuts in passenger capacity for the parent airline in Q1FY21 and Q2FY21, which will translate to a full year decline in capacity of 20 per cent and a 25 per cent slump in full-year revenue.

Stymied by weaker loads and yields, SIA will face operating losses of S$566 million in Q4FY20 and over a billion in Q1FY21, according to his calculations.

Ironically, while SIA had put in place a comprehensive jet fuel hedging programme to guard against fuel volatility, that has proven a double-edged sword after jet fuel prices have plummeted to some US$32 per barrel.

This is exacerbated by the capacity cuts, which pushes up the percentage of fuel needs that have been hedged.

On Tuesday, the flag carrier announced it was cutting capacity to 50 per cent of its original schedule until end April as more countries around the world tightened their borders to contain the virus.

Meanwhile, the latest travel restrictions put in place by the Singapore government mean that all travellers - Singaporeans or otherwise - entering the country must comply with a two-week stay home notice.

This will now affect all international visitors, as opposed to 70 per cent of visitors previously, OCBC highlighted.

Unlike other countries which have a domestic travel market to fall back, Singapore's flag carrier relies on international traffic, which means it is hit especially hard by border closures and the government's latest travel advisory for Singaporeans to defer all travel.

OCBC credit analysts reckon that SIA could follow in the footsteps of some other carriers, such as Cathay Pacific which has slashed capacity by up to 90 per cent in April and is likely to maintain the status quo in May.

For the financial quarter ended March 31, 2020, SIA had hedged 79 per cent of its fuel needs at US$76 per barrel (/bbl). However, it also has fuel hedges in place that extend beyond this fiscal quarter to financial year 2024/25 at average prices from US$58-63 per barrel.

Mr Yong estimates fuel hedging losses of S$1.2 billion for FY21 as long as oil prices continue to trend at the current low levels.

"We estimate that each US$1 decrease in Brent and/or jet fuel will impact its book value per share by 11 Singapore cents as it has to mark-to-market its fuel hedging position at the end of each financial period," he wrote, adding that the airline group may push capital expenditure from FY21 into FY22 to conserve cash.

The huge gap between spot jet fuel prices and the airline group's hedged rate of US$76/bbl could also prompt margin calls and result in cash outflow at a time when liquidity is already tight for the world's airlines, OCBC analysts said.

Shares in SIA dropped to a low of S$6.01 during trading on Thursday before closing at S$6.12, down 41 cents or 6.28 per cent from Wednesday.