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CGS-CIMB asks if Vistara-Air India merger ‘makes sense’ for SIA

Does SIA taking a 25.1% stake and injecting $1.24 billion into an enlarged Air India make sense? Find out what CGS-CIMB says.

CGS-CIMB Research analyst Raymond Yap has on Dec 6 maintained his “add” call and and unchanged target price of $5.97 on Singapore Airlines, following the airline’s plan to merge its Vistara joint venture with Air India, which is controlled by the same joint venture partner, Tata.

Under terms of the deal, SIA will sell its 49% stake in Vistara to Air India, which will essentially give SIA a 20.6% interest in the enlarged Air India.

SIA’s stake will rise to 25.1% once SIA injects $360 million into Air India after the completion of the sale transaction, which requires regulatory clearance and is targeted for March 2024.

It has also committed to inject up to a further $880 million into the enlarged Air India for operating and capital expenditure needs during FY2023 and FY2024, in proportion to its 25.1% stake.

Tata will inject all the necessary funds into Air India on SIA’s behalf while the transaction is still pending completion, with SIA only injecting funds at the completion of the sale transaction.

Yap notes that since Vistara’s carrying value in SIA’s balance sheet as of Sept 30 was zero, and the value of SIA’s 20.6% stake in the enlarged Air India has been determined as $1.11 billion, SIA will book a $1.11 billion gain from the sale of Vistara to Air India.

This is incorporated into his FY2024 forecast as an exceptional gain, which boosts his reported net profit forecast.

Does it make sense?

While there are near term losses to bear, Yap believes that SIA’s 25.1% stake in the larger entity will be more useful for its long-term goal of establishing a foothold in a fast-growing aviation market west of Singapore.

Vistara incurred a net loss of $264 million during its 1HFY2023 ended 30 Sep, and Air India incurred a net loss of $736 million in the same time frame.

Yap’s model assumes that the enlarged Air India will incur a loss of $600 million from the date of the implementation agreement on Nov 29 to Mar 31, 2023, another $1.5 billion in FY2024, and $1 billion in FY2025.

With SIA’s 25.1% stake, that translates into a loss of $527 million that SIA has to book in FY2024 and another $251 million for FY2025, says Yap.

As such, he is of the view that merger synergies may help both airlines reduce their losses, and more pertinently, without access to sufficient air traffic rights for international flights, Yap says Vistara’s growth may be constrained over the foreseeable future.

As of 1.56pm, SIA’s share price trades at $5.57, with a FY2023 P/B ratio of 0.82 and a dividend yield of 5.75%


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