Why UOB analysts are urging investors to sell SIA shares

SIA shares opened 2.5% lower on Tuesday, even as the airline resumed one-way transit routes between six countries.

Shares of Singapore Airlines (SIA) Group opened 2.5% at a three-week low of S$3.92 a share on Tuesday 23 June 2020, days after analysts from United Overseas Bank (UOB) downgraded their ratings for the stock to a ‘sell’.

Analysts advise investors to take profit on SIA shares

Last week, UOB equity researchers wrote in a new update recommending for investors to take profit on the stock, as they estimated that the airline is likely to experience a 58% traffic decline for the 2021 financial year, up from their initial projection of 45%.

They also lowered their 12-month price target on the SIA stock to S$3.80, down from S$4.13 a share previously.

They explained that ‘while the general expectation is for traffic to recover only in FY22, there is significant uncertainty over the extent of decline in traffic and load factors, and consequently the extent of cash burn in our view’.

Furthermore, they noted that the SIA group is likely to require additional funding – on top of the S$8.8 billion raised in a recent rights issue – if it does not defer planned aircraft deliveries and payments.

According to the analysts, aircraft manufacturers ‘are reluctant to delay deliveries’ and some have even threatened lawsuits on some customers. ‘This highlights the tremendous pressure that airlines are in due to large capex and a dearth of cash flow,’ they added.

SIA had earlier indicated a S$11 billion capital expenditure for FY2021 to FY2022. Based on this guidance and the pre-delivery payments, UOB has projected that the carrier would likely have S$4 billion in debt and lease repayment debt due by the end of FY2022.

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SIA restarts some routes, but ‘no reason to cheer’

Despite the airline restarting one-way transits between six countries from this week – namely Australia, New Zealand, China, Hong Kong, Japan and South Korea, analysts are still not holding their breath for a quick recovery in air travel.

Although SIA had also earlier highlighted that the number of routes and flights would be raised in June and July, UOB analysts posited that there is ‘no reason to cheer as Singapore’s borders are effectively closed, with mandatory COVID-19 testing and stay home notice for returning travellers’.

‘We also believe that border restrictions will only be gradually opened and will focus on “travel bubbles” corridors in Australia and parts of Southeast Asia,’ they wrote.

While the recent batch of Covid-19 cases in Beijing have reportedly been contained, the researchers warned that new concerns could still dampen the Chinese aviation sector’s domestic and international recovery.

As at 12:00 SGT on Tuesday 23 June, SIA Group shares are trading at S$3.96 per share, based on live IG data. Shares are down 56.4% year-to-date.

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