Singapore Airlines - Results Miss Mainly On Cost Pressure

Excerpts from UOBKayHian report

Singapore Airlines (SGX: C6L)

Singapore Airlines 3QFY24 headline net profit of S$659m (+4.9% yoy, -6.8% qoq) came in below our guided range of S$670m-810m, even though 3QFY24 was already helped by some one offs such as tax credit and disposal gains.
The miss was mainly attributable to higherthan-expected costs, as well as slightly weaker-than-expected cargo yields.
Forward ticket booking is healthy but yields for both pax and cargo operations could be under pressure.

Maintain HOLD on SIA, with a lower target price of S$6.28.

3QFY24 results missed

Singapore Airlines’ (SIA) 3QFY24 headline net profit of S$659m (+4.9% yoy, -6.8% qoq) missed our guided range of S$670m-810m.

Note that SIA’s 3QFY24 headline net profit was already helped by one-offs including a one-time tax credit and asset disposal gains partly offset by some forex losses. Excluding the impact of one-offs, the miss would have been more significant.

Cost pressure

Examining major revenue and cost items, the earnings miss was mainly due to higher-than-expected non-fuel cost, with 3QFY24 non-fuel cost per Available-Tonne-Kilometre (ATK) of 44.0 S cents exceeding our expected range of 41.5-42.5 S cents.

According to management, the company is seeing major cost pressure from staff, ground handling and in-flight meals. Apart from non-fuel cost pressure, 3QFY24 fuel cost per ATK (22.4 S cents, +8.9% qoq) also stood at the higher end of our forecast range.

The negative impacts of these items on SIA’s earnings have been partly offset by the strength in pax yields (11.2 S cents, +3.5% qoq, -7.4% yoy), which stood at the higher end of our expected range.

Healthy forward booking

According to SIA, demand for air travel remains healthy, with robust forward sales in 4QFY24 (ie Jan-Mar 24) and 1QFY25 (ie Apr-Jun 24).

The forward sales are in line with capacity increases in most markets, supported by demand for leisure travel through the school holidays and Easter peak in Mar and Apr 24.

Update on Air India

Vistara merger. SIA updated that the proposed merger of Air India and Vistara is still in progress, pending foreign direct investment and other regulatory approvals.

Once completed, the merger will give SIA a 25.1% stake in the enlarged Air India group. SIA is expected to recognised a S$1.11b non-cash accounting gain from the merger.

Valuation/Recommendation

Maintain HOLD on SIA with a lower target price of S$6.28. We have lowered our P/B valuation peg to 1.18x FY25, or 0.5SD above long-term historical mean P/B of 1.09x, from 1.26x previously.

The +0.5SD of our new P/B peg reflects our appreciation of SIA’s outstanding track record demonstrated during the pandemic.

In addition, even with the 3QFY24 earnings miss, SIA is set to report record level of earnings for the full year and can at least sustain the same 28 cents final dividend as last year.

This would lead to FY24 total dividend per share of at least 38 S cents, or over 6.0% yield based on our updated target price of S$6.28. With the valuation support from dividends, we maintain HOLD on SIA.