SIA short interest surges amid bearish industry outlook and stock’s ‘over-valuation’

THE short interest in Singapore Airlines (SIA) stock has been increasing since May, making it the second-most shorted counter after AEM Holdings in Singapore as at last Friday (Oct 13), S&P Global Market Intelligence data showed.

Short interest – defined as the percentage of outstanding shares on loan – in the mainboard-listed national carrier has stayed above 4 per cent since May 9. This is higher than the average of 2.06 per cent short interest logged by the stock over the past three years, since January 2020.

The highest levels of short interest between January 2020 and mid-October 2023 were recorded around April 2020 – ranging from 5.43 per cent to 6.22 per cent – when the pandemic started to bite. Then, the passenger capacity of the group, including budget airline Scoot, dived to only 3 per cent and load factor was under 0.5 per cent.

The recent short interest in SIA might be due to the general bearish outlook of the airline industry and the stock’s rich valuation. There were seven “sell” recommendations on SIA, Bloomberg consensus showed, compared to four “hold” and one “buy” call.

Director of securities finance at S&P Global Market Intelligence, Matt Chessum, said of the air travel industry: “Despite air travel picking up recently, a lot of airline stocks are still trading far away from their pre-pandemic levels. An increase in interest rates is expected to hit consumer spending and leisure travel (if a recession does kick in as a result). Also, in general, many airline stocks are trading well below the market average in terms of forward earnings.”

Some airline stocks, including United Airlines, are facing slight increases in short interest, FSMOne.com research analyst Charmaine Tan noted. “The spike in short interest indicates that most investors are betting on the bearish outlook of the aviation industry, potentially due to market-wide risk (relating to) increased oil prices and poorer demand for travel as the global economy slows,” she said.

SIA’s price-to-earnings ratio of 9.7 times is higher than its peer average of 8.4 times over the past year, and is also higher than its own historical average of nine times. “In short, many may believe that (the) stock is overvalued at its current price and hence, a good selling opportunity,” Tan said.

On Tuesday, brokerage CGS-CIMB reiterated its “reduce” call on the counter and also cut its target price by 16.5 per cent to S$5.66 from S$6.78, as it expects the recent rally in oil prices to weigh on the group’s earnings.

Earlier, UOB Kay Hian maintained its “sell” call as it saw the counter being over-valued and assigned it a target price of S$6.44. The team expects SIA to report lower earnings of S$420 million to S$550 million for the upcoming second quarter of FY2024. This is having considered SIA’s hedging position, the surge in jet fuel prices in the September quarter and the group’s operating data for July and August.

SIA shares were down 2.3 per cent to S$6.05 against a smaller decline of 1.2 per cent for the Straits Times Index while its mandatory convertible bonds slipped 0.1 per cent to S$1.081 at Thursday market close.