CGS-CIMB upgrades SIA to 'add', positive on FY2022 recovery

In a research note on Wednesday (Dec 1), analyst Raymond Yap said the revised target price of S$5.86 from S$5.81 previously is based on an unchanged target price-to-book value ratio (P/BV) multiple of 1.06 times, applied to the end-FY2023 adjusted book value per share of S$5.53.

The P/BV multiple of 1.06 times is 1 standard deviation above the mean since 2011 of 0.93 times.

“We used a P/BV that is above the mean to reflect our optimism over the meaningful reopening of international travel markets by mid-2022,” he said.

Even though some countries, including Singapore, have imposed fresh border control measures, Yap believes that “there is hope” as a South African doctor told Reuters that the Omicron symptoms are not severe.

“If so, nations may resume progressive reopening sooner rather than later,” said Yap.

Thus, he expects the rapid expansion of quarantine-free travel via the Vaccinated Travel Lane (VTL) schemes to boost SIA's recovery.

According to the Civil Aviation Authority of Singapore, the countries with which the Republic has launched VTLs have accounted for some 60 per cent of total daily arrivals at Changi Airport in pre-pandemic times. Though a quota of 15,000 passengers daily has been imposed on VTL travel, Yap expects this figure to be increased with time.

SIA has also said that demand for VTL flights has been very strong, and it has forecasted its available seat kilometre (ASK) passenger capacity to rise to 43 per cent of pre-Covid-19 level by Dec 31 2021F, from 33 per cent in August.

Therefore, Yap anticipates that SIA will eventually deploy 74 per cent of the airline's pre-Covid-19 ASK capacity come FY2023.

Additionally, he noted that the airfreight markets remain very strong, and SIA can look forward to a very robust year-end peak season in Q4 CY2021, as well as high airfreight rates.

On the flipside, Yap identified potential downside risks, such as longer-than-expected shutdowns in global international travel should countries keep their travel bans and restrictions on inbound travellers to quell imported Covid-19 cases.

As Singapore reopens its border to more countries, the analyst expects SIA to face competition as many airlines may be eager to reinstate passenger seat capacity quickly. As such, there could be intense competition for the incremental passenger, and passenger yields may soften, he said.

The resumption of transfer traffic through Changi Airport - a significant portion of SIA's pre-pandemic business - could also be slower in pace compared to point-to-point traffic, as transfer traffic depends on regulatory permissions across several national jurisdictions.

Also, additional passenger aircraft deployments may also cause cargo yields to fall from their currently-elevated levels as belly-hold cargo capacity is reintroduced, said Yap.

Shares of SIA were trading S$0.01 or 0.2 per cent higher at S$4.83 as at the midday break on Dec 2.