Brokers’ take: CGS-CIMB upgrades Singapore Airlines to ‘add’ on stronger demand outlook

CGS-CIMB on Tuesday (Aug 23) raised its call on Singapore Airlines (SIA) to “add” from “hold” as it expects the stock to “do very well” in the coming quarters based on a combination of improving demand, high load factors and robust yields. 

The research house has also raised its target price on the stock to S$6.10 from S$5.89 to reflect an increase in FY2023-FY2025 core net profit forecasts by 55 to 66 per cent on stronger load factors and yield assumptions. 

In a report on Monday, analyst Raymond Yap said he expects SIA to surprise the market with “very strong” FY2023 earnings going forward, as he believes travel demand is likely to be stronger than previously-expected with competition appearing “relatively muted so far”. 

While the new target price remains based on an unchanged price-to-book value multiple of 0.95 times, it factors in an adjusted book value per share calculation which assumes that SIA will redeem half of its mandatory convertible bonds (MCBs). 

“We think that SIA would be comfortable to redeem approximately half of its MCBs prior to their 4th anniversaries on 8 June 2024 and 24 June 2025 for the first and second tranches, respectively,” said Yap, noting SIA’s net gearing of about 32 per cent as at end-2020. 

On the supply end, Yap believes that SIA should be able to restore 74 per cent of its Covid-19 capacity, and rise to at least 95 per cent in FY2024 or higher if China reopens its borders in the near-term. 

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The analyst has further raised his FY2023 passenger load factor forecasts to 83 per cent from 79 per cent previously as he deems the previous assumption “too conservative”.  In his view, this bullish demand outlook is set to be further spurred by upcoming events such as the F1 race taking place from 30 Sept to 2 Oct this year, as well as MICE (meetings, incentives, conferences and exhibitions) events in H2 of FY2022 which could further boost inbound travel to Singapore).  In all, Yap sees SIA’s average passenger yields to remain at historical highs in FY2023 thanks to strong demand, although he expects them to remain lower than FY2022 due to the small traffic base in the comparative year.

“Cargo yields are also likely to remain elevated, especially between Europe and North-east Asia, due to the avoidance of Russian airspace,” he added.

As at 11.50 am on Tuesday, shares of SIA were trading S$0.02 or 0.4 per cent higher at S$5.40.