Brokers' take: SIA in firm position for eventual air travel recovery, although recovery likely priced in, says DBS

SINGAPORE Airlines (SIA) is in a firm position to wait for a recovery in air travel due to its strong cash position after it issued its S$6.2 billion mandatory convertible bonds (MCBs), DBS Group Research said in a research note on Wednesday.

The research team, however, noted that the longer-term recovery has likely been priced in, and upgraded its call on the flag carrier to "hold" from "fully valued" and raised its target price on the counter to S$4.90 from S$3.60.

Shares of SIA were trading at S$5.09 as at 3.08pm on Wednesday, down S$0.02 or 0.4 per cent.

SIA's MCBs, which saw strong support from controlling shareholder Temasek, will boost the carrier's pro forma cash balance to around S$14 billion, which provides it with a firm buffer to navigate through the current crisis and fund the capital expenditure for its fleet renewal programme, DBS said.

But the research team said the MCBs could also be highly dilutive on the counter's share price, regardless of whether they are eventually redeemed or converted, thus it added that SIA will likely look to substantially redeem most or all of its MCBs, including potentially refinancing them using straight debt or equity, once international travel recovers and the global pandemic stabilises.

Furthermore, DBS also expects SIA will post a deeper loss of S$1.2 billion in FY2022 amid a delay in the recovery of air travel, but it still anticipates a meaningful uplift in air travel activity in FY2023 - in the calendar year 2022 - driven by sustained momentum in vaccination rates.

Additionally, the research team noted that a surge in crude oil prices will have a limited near-term impact on the carrier - which is still in an over-hedged position due to hedging contracts entered into prior to the pandemic - and expects a significant write-back to its fair value reserves over the next two years on buoyant crude oil prices.

SIA will be reporting its first-quarter business updates for the financial year ended March 31, 2022 on July 29.