Date: 18 September 2024
Broker: OCBC Investment Research
Overview
Singapore Airlines (SIA), Singapore’s flagship carrier, posted a record performance for the fiscal year ending 31 March 2024 (FY24). The airline benefitted from robust travel demand and its sustained lead in capacity post-reopening. However, challenges like moderating passenger yields, increased competition, and rising costs are starting to impact the company’s outlook.
Recent Performance
SIA’s share price has recently retraced by 10.8% since 5 August 2024, after correcting close to 15% ex-dividend and post-1QFY25 business update. For 1QFY25, SIA reported a year-on-year (YoY) increase in group revenue by 5.3%, reaching SGD 4.7 billion. However, the airline’s expenditure outpaced revenue growth, rising by 14% YoY to SGD 4.2 billion. Fuel costs were a significant factor, up 30.1% YoY due to higher volume, rising fuel prices, and lower hedging gains.
Consequently, operating profit and net profit moderated by 37.7% and 38.5%, respectively, to SGD 470.2 million and SGD 451.7 million.
Capacity and Demand
Passenger and cargo yields are likely to continue moderating as global airline capacity increases. Although there are supply chain constraints and ongoing tensions in the Red Sea, these factors are expected to slow the normalisation process. Group passenger load factors (PLF) have tapered off to 85.7% in August 2024, down 2.5 percentage points year-on-year. The decline was steeper for Scoot (-3.3 ppt YoY) than for SIA (-2.1 ppt YoY).
On the positive side, cargo load factors increased by 4.9 ppt to 56.1%, boosted by lingering disruptions in the Red Sea and port congestions.
Air India Merger Potential
SIA’s 49%-owned joint venture with Tata Sons, Vistara, is set to merge with Air India, a move approved by the Indian government in August 2024. SIA will invest INR 20.6 billion for a 25.1% direct stake in the enlarged entity and may inject up to INR 50.2 billion in additional capital if required. The merger strengthens SIA’s foothold in India, a rapidly growing aviation market with a rising middle class. However, Air India is currently loss-making, and further investments may be required before it becomes profitable.
Financial Outlook and Valuation
SIA’s fair value estimate remains at SGD 6.84. Currently, SIA is trading at a forward 12-month price-to-book (P/B) ratio of 1.3x, near one standard deviation above its five-year historical average. It offers a forward 12-month dividend yield of 4.7%, which is higher than its five-year historical average, though still lower compared to Singapore banks and select S-REITs.
SIA’s revenue projections for FY25 and FY26 are SGD 19.02 billion and SGD 19.23 billion, respectively, with net profits expected to decline to SGD 1.73 billion in FY25 and SGD 1.43 billion in FY26. This reflects ongoing challenges such as rising fuel costs and moderating demand.
ESG Performance
SIA scores better than its global peers in terms of social issues due to its robust compensation practices, higher customer satisfaction, and strong on-time performance metrics. It is also on par with its peers regarding corporate governance, including business ethics training and detailed anti-corruption policies. The company has adopted industry best practices in data security, mitigating regulatory risks in case of customer data breaches.
Investment Risks and Catalysts
Potential Catalysts:
- A stronger-than-expected recovery in capacity.
- Rapid network growth, particularly in the Asia-Pacific region.
- Favourable fluctuations in oil prices.
Investment Risks:
- A significant weakening in cargo demand.
- Increased competition as other airlines ramp up international capacity.
- Steep moderation in air travel demand and prices.
Analyst Rating
OCBC Investment Research has downgraded its rating for SIA to “Hold” due to the current valuation, normalising outlook, and limited near-term catalysts. Although the airline’s long-term value remains attractive, the near-term risk-reward profile is less favorable following recent share price gains.
