Singapore Airlines: Comprehensive Financial Analysis and Market Insights

Broker: OCBC Investment Research

Date of Report: 11 November 2024

Introduction

Singapore Airlines, a cornerstone of Singapore’s aviation sector, has recently issued its financial update for the first half of FY25. This report dives deep into the company’s financial performance, market position, and future outlook, offering a comprehensive analysis for investors and stakeholders.

Moderating Trajectory and Financial Performance

Singapore Airlines’ net profit for the first half of FY25 moderated by 48.5% year-on-year, amounting to SGD742 million. This figure fell short of expectations due to higher-than-anticipated non-fuel expenditure. The company declared an interim dividend of 10 Singapore cents, consistent with the previous year. Analysts anticipate continued moderation in passenger yields and potential upward pressure on costs, leading to a revised fair value estimate of SGD6.30.

Investment Thesis

Singapore Airlines (SIA) demonstrated exceptional performance in FY24, driven by robust travel demand and a leading position in capacity post-reopening. However, with passenger yields likely having peaked, SIA is expected to face a moderating trajectory as other airlines increase market capacity. Despite this, SIA’s strong brand, service quality, and product innovation are expected to help navigate the transition from recovery to growth. While near-term normalization is expected, SIA remains a valuable long-term investment.

Investment Summary

• 2QFY25 revenue grew by 2% YoY to SGD4.8 billion, with passenger flown revenue declining by 0.9% YoY to SGD3.8 billion due to a 6.5% drop in yields. Passenger capacity increased by 9.7%, outpacing traffic growth at 6.3%, resulting in a slight dip in passenger load factors to 85.8%.
• Cargo flown revenue saw an 8.3% YoY increase to SGD562 million, driven by strong demand, despite a 7.7% decline in cargo yields. Cargo load factor improved by 3.7 percentage points to 57.2%.
• Group expenditure rose by 14.7% YoY to SGD4.5 billion, primarily due to inflationary cost pressures affecting handling and passenger costs. Net fuel costs increased by 10.6% YoY on higher volume uplifted and lower fuel hedging gains, partially offset by lower fuel prices.
• Operating profit and net profit fell by 59.3% and 59% YoY to SGD325.4 million and SGD290.3 million, respectively.

1HFY25 Financial Overview

For the first half of FY25, revenue met expectations, but higher-than-expected non-fuel costs led to a bottom-line miss. Revenue and expenditure increased by 3.7% and 14.4% YoY to SGD9.5 billion and SGD8.7 billion, respectively. Operating profit and net profit moderated by 48.8% and 48.5% YoY to SGD795.6 million and SGD742 million, respectively. SIA’s interim dividend of 10 Singapore cents per share is flat YoY and will be paid out on 11 December 2024.

Revised Fair Value Estimate

Amid intensifying competition and increased capacity in the global aviation industry, SIA’s full-service carrier (FSC) segment has experienced pressure on yields since 3QFY24, though they remain above pre-COVID levels. FSC’s unit cost excluding fuel has risen since FY20 but remains only about 6% above pre-COVID levels due to operational efficiency initiatives. Despite robust travel demand, passenger yields are expected to continue moderating, with margins potentially under pressure from higher handling costs.

Changi Airport’s upcoming fee increases to fund a SGD3 billion improvement plan and cover rising costs are also noted. Consequently, analysts have adjusted forecasts and lowered the target price-to-book multiple from 1.2x to 1.1x, aligning with the 5-year historical average. This results in a revised fair value estimate of SGD6.30, reaffirming the HOLD rating.

ESG (Environmental, Social, and Governance) Updates

Singapore Airlines scores favorably compared to global peers in social issues due to robust compensation practices, high customer satisfaction, and on-time performance metrics. The company is on par with peers regarding corporate governance practices, including staff training on business ethics standards and anti-corruption policies. SIA has adopted industry best practices in data security to mitigate risks in the event of a customer data breach.

Potential Catalysts

• Stronger-than-expected recovery in capacity
• Rapid network growth to capture demand, particularly in the Asia-Pacific region
• Favorable fluctuations in oil prices

Investment Risks

• Significant weakening in cargo demand
• Increased competition as other airlines ramp up international capacity
• Steep moderation in air travel demand and prices

Valuation Analysis

Company Overview

Singapore Airlines Group’s history dates back to 1947 with the maiden flight of Malayan Airways Limited. The airline was later renamed Malaysian Airways Limited and then Malaysia-Singapore Airlines. In 1972, Malaysia-Singapore Airlines split into Singapore Airlines (SIA) and Malaysian Airline System.

Initially operating a modest fleet of 10 aircraft to 22 cities in 18 countries, SIA has grown significantly and now boasts a fleet of over 180 aircraft. SIA operates three main business segments: Full-Service Carrier (Singapore Airlines brand), Low-Cost Carrier (Scoot brand), and Engineering Services. The Engineering Services segment manufactures aircraft cabin equipment, provides airframe maintenance and overhaul services, technical ground handling services, and fleet management services.

SIA employs a multi-hub strategy, with a presence in India through Vistara and Thailand through NokScoot. These investments allow SIA to create new markets and tap into new traffic flows.

FY24 Revenue Breakdown

• Full Service Carrier: 85.1%
• Low Cost Carrier: 12.9%
• Engineering Services: 5.8%
• Others: -3.7%

FY24 Airline Operations Revenue Breakdown

• East Asia: 53.7%
• Europe: 14.1%
• South West Pacific: 17.1%
• West Asia & Africa: 7.4%
• Americas: 7.9%

Company Financials

Singapore Airlines’ financial performance over the past few years has been marked by significant fluctuations, driven by external factors such as the COVID-19 pandemic and subsequent recovery. The following is a detailed analysis of the company’s financial statements and key ratios.

Income Statement

Profitability Ratios

Credit Ratios