Singapore Air flying low on mixed performance, but analysts still positive

SINGAPORE (Nov 11): Although Singapore Airlines (SIA) reported mixed performances across the group in 2Q20, analysts are still remaining positive on the stock.

In its latest 2Q20 results, SIA’s earnings came in at $94.5 million, 70% higher y-o-y, mainly due to higher contributions from associates and joint ventures of $78 million only to be offset by higher finance charges of $28 million.

Revenue increased by 5.3% y-o-y to $768.5 million, mainly driven by growth in passenger-flown revenue, although the topline was dragged down by cargo-flown revenue.

Operating performances were mixed across the group. Parent airline reported a 1.7% decrease in operating profit to $233 million from $237 million a year ago; SilkAir reported losses remained unchanged at $3 million a year ago; while Scoot reported losses widened to $39 million from $11 million.

See: SIA 2Q revenue and earnings up despite mixed performances across group

The increase in SIA’s revenue was led by a growth in passenger loads, but this was offset by weaker cargo revenue and higher net fuel and other expenditure.

Although this came in below Maybank Kim Eng’s estimates, the research house is still keeping its “buy” call on SIA, but with a lower target price of $10.70, from $11.20 previously.

In a Nov 6 report, analyst Mohshin Aziz says, “SIA is able to fill up its passenger capacity convincingly. However, this is at the expense of low yields and therefore suggests the market is still fragile. SIA is able to navigate the current tough conditions better than its peers due to its fuel hedge and cost efficient operations, but the profits will be lower than last year.”

Aziz also warns that the aviation sector is undergoing one of its most challenging periods due to overcapacity and relatively subdued market. Hence, “a structural consolidation is required”, but very few airlines have done so.

Similarly, DBS Group Research continues to rate SIA a “buy”, but with a lower target price of $10.40, from $10.80 previously.

In a Nov 6 report, analyst Paul Yong says, “To factor in weaker-than-expected contributions from Scoot, Silkair and SIA Cargo, we lowered our FY20 and FY21 earnings estimates for SIA by about 15% and 7% respectively.”

Nonetheless, the analyst is positive on the group’s transformation programme paying off.

OCBC Investment Research is also reiterating its “buy” recommendation on SIA with a lower fair value of $10.46 from $11.02.

Driven by SIA’s long-haul flights to the US, passenger bookings in the near-term are expected to remain healthy and stronger y-o-y. The flown revenue is also expected to be keep being the group’s main growth driver and KrisShip to show higher revenue contribution in 2H20.

However, cargo revenue remains a concern and rising expenditure may be a short-term drag, given SIA’s strategy to grow in capacity with 159 outstanding aircraft deliveries to support fleet renewal and expansion.

In a Nov 7 report, analyst Chu Peng says, “Nonetheless, we believe that this is beneficial to the group in the long run. The new aircrafts could improve fuel efficiency by 26-30% and also give the group the capability to operate into new markets such as the long haul market.”

On the other hand, CGS-CIMB Research is less bullish on SIA, keeping it on “hold”. This is premised on weakening global GDP growth and the US-China trade war which have been negatively affecting SIA’s airfreight demand and yield since late 2018.

The research house has also lowered its target price to $10.00 from $10.04.

In a Nov 6 report, analyst Raymond Yap says, “SIA’s revenue management system has successfully delivered RASK expansion for SIA mainline over the past two years, with strong premium cabin traffic supporting yields and bookings. So far, SIA mainline has not seen weaker premium demand despite slowing global economic momentum.”

See: SIA sees results of digital transformation as journey reaches last leg

As at 12.20pm, shares in SIA are trading at $9.28 or 0.85 times FY20 book with a dividend yield of 3.2%.