Why JP Morgan analysts rated SIA shares ‘underweight’

Singapore Airlines’ (SIA) share price fell to a two-month low on Monday, as the stock's forecast remained grey.

SIA share price kickstarts the week at two-month low

Shares of national carrier Singapore Airlines (SIA) fell to a two-month low within the first 90 minutes of trading on Monday 20 July 2020, following last week’s soft earnings preview.

As at 13:10 SGT on Tuesday 21 July 2020, SIA stocks have rebounded slightly, and are trading at S$3.71 a share.

IG’s market analysis show that ‘buys’ form 75% of all trades on the SIA counter on Tuesday. Across the week so far, ‘sells’ dominated trades at 59%.

In terms of client sentiment, 95% of IG client accounts with open positions in this market expect the price to rise, while the remaining 5% of clients envision a price decline.

Analysts say SIA may face S$740 million net loss

On 10 July, JP Morgan analyst Karen Li reiterated an ‘underweight’ rating on the SIA stock, over concerns of the group’s associated Covid-19 capacity dilution impact, as well as potential challenges in ramping its return profile back up in the medium term.

She thus maintained a ‘cautious view on SIA’s near-term operational outlook’, noting that the airline group’s capacity cuts, coupled with its oil hedge position, ‘could lead to meaningful losses near-term, particularly given the current low oil price environment’.

In addition, she gave SIA a share price target of S$4 per share, based on a target price-to-book multiple of 0.55x that she said is in line with trough-level valuations.

Reversely, Li said that downside catalysts include a faster-than-expected recovery in travel demand/consumer confidence post-Covid-19 and a rapid recovery in oil prices in the near term.

IG’s industry-leading CFD trading platform allows you to buy long and sell short Singapore Airlines (SIA) shares without having to trade the actual asset.

Meanwhile, Bloomberg Intelligence aviation analysts James Teo and Chris Muckensturm estimated in a 15 July note that SIA may face a potential S$740 million net loss in Q1 and drag from S$124 million in one-off costs due to the liquidation of its NokScoot joint venture in Thailand.

They added that realised fuel hedging losses for the quarter could rise sharply to S$570 million, with oil prices falling below US$30 per barrel for most of April and May.

SIA expects ‘material operating loss’ in Q1

Last Wednesday 15 July, SIA Group reported that its passenger carriage for the month of June 2020 across all its airlines declined 99.5% year-on-year.

As a result, passenger load factor for the whole month fell 74% from June 2019 to 12.2% across the group.

The airline also stated in the same update that it expects to report a material operating loss for the first quarter of fiscal 2020/2021.

It added that although a green lane was established between Singapore and selected cities in China in June – alongside the lifting of transit restrictions via Singapore, easing of border controls and travel restrictions remain ‘slower than expected’.

With industry forecasts estimating a two to four-year recovery time frame for passenger traffic to return to pre-pandemic levels, the group stated that its ‘recovery trajectory will be slower than initially projected, and will have a material impact on our revenue generation capability in FY20/21’.

Full details will be provided on 29 July 2020, when first quarter results for FY2020/2021 will be announced.

How to trade SIA shares with IG

Are you feeling bullish or bearish on Singapore Airlines stocks? Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG's industry-leading trading platform in a few easy steps:

  • Create a live or demo IG Trading Account, or log in to your existing account
  • Enter <Singapore Airlines Ltd> in the search bar and select the instrument
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

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