Date of Report: September 17, 2024
Broker Name: UOB Kay Hian
Overview of Singapore Airlines
Singapore Airlines (SIA) is Singapore’s national carrier, known for its extensive global network, premium services, and frequent accolades as one of the world’s best airlines. The company operates more than 130 destinations across over 30 countries. Despite its strong market presence, SIA is currently facing challenges due to increasing competition and weaker-than-expected load factors.
Key Financial Data
- Share Price: S$6.12
- Target Price: S$5.83
- Market Capitalization: S$18.2 billion (USD 13.8 billion)
- Price-to-Earnings (PE) Ratio:
- Dividend Yield:
Weaker Load Factors Amid Growing Competition
SIA’s passenger load factor for August 2024 remained below pre-pandemic levels for the second consecutive month, signaling increased competition in the region, especially on key international routes. Despite the airline operating close to pre-pandemic capacity levels, load factors have not fully recovered, pointing to heightened competitive pressures from other airlines.
Projected Earnings Decline for FY25
SIA’s earnings are projected to see a significant year-on-year decline in FY25. The estimated earnings for the upcoming quarter (2QFY25) are expected to be in the range of S$360 million to S$460 million, representing a substantial decline from S$707 million in 2QFY24 and a likely quarter-on-quarter fall from S$452 million in 1QFY25. This earnings contraction is driven by weaker load factors, rising competition, and the lack of near-term re-rating catalysts.
Recent Jet Fuel Price Drop Provides Short-Term Support
Global jet fuel prices have dropped by approximately 20% since the end of June 2024, offering some short-term relief to SIA’s operating costs. However, these cost savings are expected to be largely passed on to customers due to competitive pricing pressures, limiting the long-term impact on profitability.
Cargo Operations and Network Recovery
Cargo operations have shown a moderate recovery, with cargo load factors at 96.5% of pre-pandemic levels in August 2024. However, SIA’s cargo operations have not fully rebounded, partly due to the replacement of larger aircraft (such as B777s and A380s) with smaller capacity aircraft (B787s and A350s). Meanwhile, SIA’s passenger network covered 125 destinations in 36 countries as of August 2024, with network recovery continuing gradually.
Vistara-Air India Deal Progress
SIA is on track to complete the merger between Vistara and Air India by the end of 2024, having already received Foreign Direct Investment (FDI) approval from the Indian government. While the merger is strategically important, both Vistara and Air India were loss-making in FY24, and it may take another 1-2 years for the enlarged Air India entity (in which SIA will own a 25.1% stake) to achieve profitability.
Financial Performance and Forecasts
- FY25 Financial Projections:
- Revenue: S$19.25 billion
- EBITDA: S$3.98 billion
- Net Profit: S$2.64 billion (including an accounting gain from the Vistara-Air India merger)
- Core Net Profit: S$1.39 billion
- Net Debt/Equity: 12.5%
- Dividend Yield: 4.9%
Risks
- Downside Risks:
- Weaker-than-expected macroeconomic conditions, which could impact air travel demand
- Intensifying competition, particularly on Asia-Europe routes, leading to further load factor declines
- Potential volatility in fuel prices, despite recent declines, that could increase operating costs
- Delays in the turnaround of the merged Vistara-Air India entity, affecting SIA’s investment returns.
Valuation and Recommendation
UOB Kay Hian maintains a SELL rating for Singapore Airlines, with a target price of S$5.83, reflecting a 10.3% downside from the current share price. The valuation is based on a 1.09x price-to-book ratio for FY25, in line with SIA’s historical average. The recommendation is driven by the projected earnings decline, weaker load factors, and increasing competition, making the stock less attractive for investors in the near term.
