SIA shares worth adding for investors with ‘high risk tolerance’: analysts

While the road to recovery for airlines is challenging, analysts say SIA shares are worth considering for a specific investor profile.

SIA and SilkAir relaunches flight routes

National carrier Singapore Airlines (SIA) and its regional arm SilkAir are reportedly relaunching a portion of its scheduled passenger flights starting from June and July 2020.

According to SIA’s website, routes that will be restored include the following cities: Adelaide, Amsterdam, Auckland, Barcelona, Brisbane, Cebu, Christchurch, Copenhagen, Hong Kong, Medan, Melbourne and Osaka.

IG data showed that SIA shares opened 4.9% higher at a three-week high price of S$4.08 per share on Tuesday 02 June, a day after the report.

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SIA open-market shares fell 30% in May 2020

SIA’s open-market value fell as much as 30% last month, after the company undertook a rights issue for shares on 07 May 2020, during which over 1.7 billion new ordinary shares were issued at a price of S$3.00 for each rights share, alongside S$3.5 billion worth of mandatory convertible bonds in the denomination of S$1.00 for each rights bond.

On 14 May, the airline also reported its first annual net loss since its founding 48 years ago. For the financial year ended 31 March 2020, SIA Group recorded a net loss of S$212 million, a reversal from the S$683 million net profit recorded in Q4 of FY2018/2019.

Group net loss for the March ending quarter alone also came in at S$732 million, down from a net profit of S$203 million in the same period a year prior.

As a result of the losses, the group’s board decided not to propose a final dividend for FY2019/2020. Total dividend for the year is thus S$0.08 per share, via the interim payment on 27 November 2019. SIA Group has a five-year dividend average of S$0.23 per share.

SIA predicts more fuel hedging losses for FY2020/2021

With aviation’s recovery still looking, the group had said in the earnings release that it will aim to ‘maintain a minimum flight connectivity within its network during this period, while ensuring the flexibility to scale up capacity if there is an uptick in demand’.

Things are looking more positive on the cargo front, as the airline expects revenues to be sustained in the near term, with demand for essential goods like medical supplies and fresh food products still exceeding air freight capacity (operating at roughly 40% of maximum cargo capacity) on many key routes.

Finally, SIA said further fuel hedging losses this year is expected this year, with fuel prices predicted to remain weak in the near term. The company previously informed that the collapse of fuel prices in March 2020 had led to fuel hedging losses on contracts maturing in the final quarter of FY2019/2020, with 79% of its fuel requirements in MOPS hedged at a weighted average price of US$76 per barrel.

CIMB: investors with ‘high risk tolerance can accumulate’ SIA stock

Following the financial report, analysts from CIMB and United Overseas Bank (UOB) upgraded their ratings on the stock.

CIMB broker Raymond Yap gave the stock an ‘add’ rating (up from ‘hold’), alongside a higher share price target of S$4.60 (up from S$4.45), as he estimated that the group’s full-year core net loss for the 2021 financial year could potentially fall from the previous estimate of S$957 million to S$720 million, with the mark-to-market (MTM) fuel hedging loss of S$710 million already charged into FY2020’s profit and loss statement.

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Furthermore, he noted that if the OPEC+ oil production cuts do succeed in increasing oil prices, SIA could benefit from MTM fuel hedging gains on the over-hedged portion, which would be booked in FY2021’s financial statement.

‘There are many uncertainties, however, and we now assume that SIA’s combined passenger airline business will see a 57% year-on-year revenue passenger kilometres decline in FY21F vs. our previous -43% assumption,’ Yap added.

‘Investors with a high risk tolerance and a one-year investing horizon can accumulate SIA for the eventual relaxation of Covid-19 restrictions and a share price relief rally,’ he said.

UOB: SIA would face ‘significant challenges in adjusting capacity’

Meanwhile, UOB’s K Ajith predicts that the group’s FY2021 loss is likely to be higher than S$1 billion as he expects air traffic recovery to be long drawn. On that note, he raised his net loss estimate for the group by S$1.2 billion.

Even if there is a recovery, he says that it would be more skewed towards short-haul routes, rather than long-haul routes. As such, he posits that SIA would face ‘significant challengers in adjusting capacity to maximise load factors and revenue’.

Despite the higher loss projections, Ajith believes that most of the air travel demand destruction has already been priced into current share price levels, with other positives like the sale and leaseback of unencumbered aircraft yet to be factored into calculations.

He upgraded his rating on the SIA stock to a ‘buy’ and a fair value purchase price of S$4.34 a share.

UOB also treated 50% of the mandatory convertible bonds as equity, thereby valuing the diluted 2021 book value at 0.8x versus 1.0x previously.

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