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SIA kept at 'buy' with transformative journey improving profitability

PC Lee

SINGAPORE (May 23): DBS Group Research is maintaining Singapore Airlines at “buy” with $10.80 target price on expectations of improvement in SIA’s profitability in FY20 as it carries out its transformative journey and valuations stay undemanding.

DBS credits SIA’s transformation programme for making a difference with revenue growth finally returning after years of stagnation and cost management efforts also bearing fruit. This is evident in SIA posting stronger profit performance in 2H19 compared to 1H19.

In addition, although jet fuel prices have rebounded to US$85/bbl currently, SIA has hedged 69% of its FY20 fuel consumption at US$76/bbl, offering significant downside protection should oil and jet fuel prices spike.

Currently, SIA is trading at around 0.8 times FY20F book value, or -1.5 SD against its 10-year average and with a decent prospective yield of 3.2%.

“Maintain ‘buy’ with target price of $10.80, against a projected ROE of 7% for FY20F. Our target price is based on 0.95x FY20F P/BV, which is at SIA’s 5-year average price-to-book valuation,” says DBS, adding SIA’s share price should re-rate as its earnings continue to show signs of recovery.

Likewise, Maybank Kim Eng has a “buy” for SIA with $11.20 target price based on 0.94 times book value as it likes SIA for its careful and well thought growth strategy, which should enable it to be more defensive relative to other airlines that are embarking on aggressive growth.

Furthermore, its 5% FY20E dividend yield is attractive compared to other carriers and also against the STI.

SIA’s FY19 core net profit of $803 million was 32.8% lower y-o-y due to lower yields and higher unit cost. Passenger yields declined by 5.5% y-o-y on higher competition but cargo yields remained strong with a yield growth of 11% y-o-y. Unit cost increased by 4.4% y-o-y, primarily on higher jet fuel prices.

“FY19 core net profit was 96% of our forecast but well ahead of consensus at 112%,” says Maybank analyst Mohshin Aziz, “Yields came in lower than we expected but operating cost items were largely within our expectation.”

Management has indicated that forward bookings for 1Q20 are looking positive versus the year-ago period. Premium cabin demand is also “exceptionally robust”. However, traffic to China is struggling due to massive capacity injections from many Asean carriers, thus causing overcapacity. SIA’s fuel hedges are also “in the money” at current levels.

As at 3.31pm, shares in SIA are down 9 cents at $9.12.