Analysts keep ‘reduce’ and ‘sell’ calls on SIA despite record quarterly performance

Douglas Toh
4-min read

Analysts are pleased as Singapore Airlines records its highest quarterly results.

Analysts are pleased with Singapore Airlines (SIA) C6L as the group recorded a set of healthy 1QFY2024 ended June results, believing that profits have peaked this quarter.

On Jul 28, SIA announced that its net profit came in at $734 million, a 98% improvement y-o-y and 16% higher q-o-q. Its highest quarterly performance in its history came amidst robust demand for air travel through the mid-year school holidays and the start of the summer travel season.

The group posted an operating profit of $755 million, 35.8% better than the $556 million operating profit a year before.

See more: SIA posts record quarterly net profit of $734 million for 1QFY2024, nearly doubling y-o-y

Following the record set of results, CGS-CIMB Research and Citi Research have kept their “reduce” and “sell” calls. CGS-CIMB has upped its target price to $6.78 from $6.53 previously while Citi has retained its target price at $6.54.

In his July 28 report, CGS-CIMB’s Raymond Yap noted that the group’s 1QFY2024 core net profit surpassed expectations coming in at 41% of his full-year forecast due to low jet fuel prices.

He is also positive on SIA’s guidance of strong passenger loads over the next three months of summer travel, with revenue passenger kilometres (RPK) demand closely matching available seal kilometres (ASK) capacity injections. Similarly, demand for year-end travel has also been strong.

“This suggests that [SIA’s] passenger load factor (PLF) will likely remain high for the rest of FY2024, in our view, and we have reflected this by raising our PLF assumptions for all forecast years,” he says.

Despite this, the analyst expects rising fuel prices to impact core profit.

“We do note that jet fuel prices averaged only US$92 ($152) /barrel (bbl) in 1QFY2024 and have since risen to US$108/barrel as at July 27,” he writes.

He adds: “We estimate that every US$1 a barrel increase in jet fuel prices will negatively impact our FY2024 core net profit by 2%, and in the same way that low jet fuel prices played an important role in SIA’s strong 1QFY2024 performance, recovering jet fuel prices in 2QFY2024 may deduct from SIA’s profits moving forward.”

“Also, SIA’s legacy fuel hedges all expired at end-June 2023, and the remaining hedge positions are at prices closer to prevailing market levels, which suggest fuel hedging gains, if any, may be narrowed in the quarters ahead,” he continues.

Meanwhile, while Yap believes SIA is “poised to deliver excellent FY2024 results”, not including an estimated $527 million share of Air India’s net loss in 4QFY2024, he also sees greater competition risks for the airline in the next financial year.

“SIA’s expensive valuations also expose investors to de-rating catalysts such as intensifying competition from other airlines, particularly for FY2025,” he notes.

For FY2024, Yap is forecasting SIA’s core net profit to come in at $2.5 billion, up from FY2023’s $1.9 billion. He is also expecting the airline to declare a distribution per share (DPS) or dividend of 38 cents for FY2024.

In his view, upside risks include potential for SIA to outperform assumptions for yield, PLF and other revenue metrics.

Citi Research analyst Kaseedit Choonawat is slightly less upbeat in his outlook, as he believes that quarterly earnings have likely peaked for this current cycle.

This is given the citing “sequentially declining” passenger yield of 5% to 6% a quarter for the past two quarters as industry capacity resumes, the current cabin factor of around 90% for long-haul full service network carriers, the full utilisation of the group’s fleet and a likely step up in unit costs as cheaper hedges have matured.

Choonawat’s target price of $6.54 is based on 1.25x FY2025 P/B in relation to 9% prospective core return on equity (ROE).

“Despite a beat and strong earnings outlook in FY2023/2024, we continue to see share price tilted to downside at 1.4x FY2024/2025 P/B as passenger pricing continues to gradually normalise upon resumption of industry’s supply,” says the analyst.

Noted upside risks include fuel price decline, improvements in the European geopolitical situation leading to lower inflation pressure and further fall out of Asean competitors, Air India turning slightly profitable where SIA takes on greater stakes beyond 25% merged entity and the market willing to rescue the risk-premium of SIA as it incrementally becomes a direct proxy of Singapore tourism.

As at 11.50am, shares in SIA are trading at 13 cents lower or 1.72% down at $7.45 on Jul 30.

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