“Less optimistic” of a traffic recovery by 3Q2021

UOB Kay Hian analyst K Ajith has downgraded Singapore Airlines (SIA) to “sell” with a slightly lowered target price.

“We had previously valued SIA at 1.0 times FY2022 and FY2023’s book value to derive a target price of $4.43. We now raise our fair value price-to-book (P/B) assumption to 1.1 times FY2022 and FY2023 average and derive a target price of $4.40,” he writes in a report dated April 14.

“Excluding [the] $6.2 billion in mandatory convertible bonds (MCB) which is recognised as equity, SIA is trading at about 1.6 times FY2022’s book value or about 70% premium to pre-Covid-19 levels… [which] is anything but cheap,” he adds.

Ajith believes at current levels, SIA’s stock price is trading higher than its foreseeable fundamental value.

Since 4QFY2020 ended Dec 31, 2020, the airline’s stock price has tracked the US Global Jets (JETS) ETF, and its stock price is only about 7% away from its pre-Covid-19 levels, as vaccines became available.

“We believe that much of the re-rating on SIA was led by ETF purchases on expectation that vaccinations would lead to a swift recovery in traffic. While domestic air travel has recovered in China and moderately in the US, international air travel has shown no signs of recovery as governments grapple with increasing infections and new strains,” he writes.

For SIA, this translates to a monthly operating cash burn of between $200 million to $250 million.

The carrier had also guided for $4 billion in capital expenditure (capex) for FY2022 and another $4.5 billion in FY2023.

“Assuming that capex is distributed evenly, at 1HFY2022, SIA could have utilised at least $3.8 billion in cash or 30% of its liquid funds,” notes Ajith.

“A key uncertainty is whether SIA will exercise the option to tap into another $6.7 billion in MCB. The option will expire by July. Given these uncertainties, we downgrade SIA to ‘sell’,” he adds.