Singapore Airlines’ 1HFY25 Financial Performance: A Detailed Analysis

UOB Kay Hian

Tuesday, 12 November 2024

Company Overview

Singapore Airlines (SIA) is the flag carrier of Singapore, renowned for its extensive global network and consistent ranking as one of the best airlines in the world. The airline operates flights to over 130 destinations across more than 30 countries, adapting to the changing dynamics of the aviation industry.

Stock Performance and Shareholder Composition

As of the report date, SIA’s share price stands at S\$6.29, with a market capitalization of S\$18.7 billion. The airline has a significant shareholder in Temasek Holdings, owning 53.6% of the shares. The stock has experienced fluctuations over the past year, reaching a high of S\$7.38 and a low of S\$5.86.

Earnings Report: 1HFY25

Singapore Airlines reported a headline net profit of S\$290 million for 2QFY25, a significant decline of 59% year-over-year (yoy) and 36% quarter-over-quarter (qoq). The results fell short of the expected range of S\$360 million to S\$460 million, primarily due to higher-than-expected operating costs.

Revenue Breakdown

For 1HFY25, SIA’s revenue increased by 3.7% yoy to S\$9.50 billion, driven by a modest rise in pax flown revenue (+1.6%), cargo and mail revenue (+4.0%), and engineering and other services (+31.7%). However, the rise in revenue was offset by increased non-fuel operating expenses and fuel costs, which grew by 12.1% and 19.6%, respectively.

Operating and Core Performance

The airline’s operating profit fell by 48.8% yoy to S\$796 million, while core operating profit, adjusted for one-offs like fuel hedging gains and forex fluctuations, dropped by 43.8% yoy to S\$736 million. The core net profit also saw a significant decline of 41% yoy to S\$669 million, forming only 38% of the full-year forecast.

Cost Analysis

Non-fuel operating costs per available-tonne-kilometre (ATK) rose by 3.5% qoq in 2QFY25, exceeding the projected range. This increase, alongside higher unhedged fuel costs, negatively impacted SIA’s profitability due to its high operating leverage.

Yield Moderation

Pax and cargo yields moderated by 6.7% and 7.7% yoy, respectively, in 2QFY25, aligning with expectations. The moderation was attributed to increased capacity supply from regional competitors.

Dividend Declaration

SIA declared an interim dividend of 10 S cents for 1HFY25, consistent with the previous year.

Balance Sheet Strength

SIA maintained a strong balance sheet with a marginal net debt position of S\$155 million as of end-1HFY25, translating to a net gearing of 1.1%. This positions the airline well to navigate the competitive and uncertain operating landscape.

Management Outlook and Performance Expectations

Management projects robust demand for air travel and healthy air freight demand in 2HFY25, despite competitive pressures. They anticipate satisfactory operating performance in 2HFY25, supported by decent yields and seasonal strength, with the recent decline in jet fuel prices expected to bolster profitability in 3QFY25.

Air India-Vistara Merger Update

The merger between Air India and Vistara is set to complete shortly, with all Vistara flights renamed as Air India flights from 12 November 2024. Post-merger, SIA will inject S\$498 million into Air India, acquiring a 25.1% stake in the enlarged entity. Future capital injections will depend on Air India’s requirements and funding options.

Financial Impact of the Merger

The merger is expected to result in a S\$1.1 billion accounting gain for SIA due to the deemed disposal of its Vistara stake. However, given Air India’s loss-making position in FY24, it is anticipated to contribute negatively to SIA’s profitability initially, with an annual loss run-rate of up to S\$175 million.

Earnings Revision and Risks

Net profit forecasts for FY25/26/27 have been cut by 9%/7%/1% to S\$2.72 billion/S\$0.95 billion/S\$1.05 billion, respectively, reflecting the 1HFY25 results miss and updated cost projections. Key risks include a weaker macroeconomic environment, air cargo demand affected by tariff hikes, and faster-than-expected competition recovery.

Valuation and Recommendation

SIA is maintained at a SELL rating with a target price of S\$5.72, based on a 1.09x FY26F P/B ratio. The airline currently trades at 1.20x FY26F P/B, 0.5 standard deviations above its historical mean. Investors are advised to await a more compelling valuation to re-enter SIA, with potential upside risks including a quicker turnaround of Air India.

Key Financial Metrics

For FY24, SIA reported a net turnover of S\$19.01 billion, with an EBITDA of S\$4.91 billion. The net profit (reported) was S\$2.67 billion, while the core net profit was S\$2.12 billion. The airline’s balance sheet reflected total assets of S\$44.26 billion and total liabilities & equity of S\$41.62 billion. The net cash inflow for the year was S\$5.05 billion.

Conclusion

Singapore Airlines faces challenges with rising costs and competitive pressures, but its strong balance sheet and strategic moves like the Air India-Vistara merger position it well for future growth. Investors should monitor the airline’s performance closely, considering both the risks and potential upsides.