SG forecast: SIA earnings preview

Singapore Airlines (C6L:SG) will be issuing its business update for the third quarter of fiscal year 2024 (covering the period from October to December 2023) on 20 February 2024.

Beginning with positive developments, the Singapore national carrier reported a 15.8% surge in passenger traffic in December 2023, coinciding with the peak travel season at the year's end.

The airline experienced a 15% increase in revenue passenger kilometres for December 2023 compared to the previous year, reaching 10.1 billion from 8.8 billion. Although passenger capacity outpaced passenger traffic by 16.1%, the resulting passenger load factor (PLF) stood at 89.4%, marking a slight 0.3 percentage points decrease from the preceding year. (Passenger load factor is calculated as a percentage of available seat-kilometres.)

In December 2023, SIA's passenger load factor (PLF) was 88.7%, marking a 0.4 percentage point decrease from the previous year's 89.1%. Meanwhile, Scoot experienced a notable increase in its December 2023 PLF, reaching 91.7%, representing a 10-percentage-point rise from the preceding year.

The combined passenger count for both airlines totalled 3.3 million in the month, reflecting a significant 24.4% increase compared to the same period the previous year.

The combined passenger count for both airlines totalled 3.3 million in the month, reflecting a significant 24.4% increase compared to the same period the previous year.

Cargo carriage demonstrated a year-on-year growth of 4.3%, driven by heightened e-commerce demand. However, the expansion of passenger services led to increased bellyhold capacity, resulting in a cargo load factor of 52.6% in December 2023, a 1.7 percentage points decrease from the prior year.

SIA Price Upgrade

On a positive note, CGS-CIMB has revised its recommendation for the national flag carrier, upgrading it from "reduce" to "add." The research firm is optimistic about the airline's performance and anticipates a third-quarter profit after taxes and minority interest (Patmi) of approximately S$800 million, followed by a Patmi of S$700 million in the fourth quarter.

To align with lower jet fuel consumption estimates, adjusted all-in jet fuel price assumptions, and heightened cargo yield expectations, CGS-CIMB has increased its core net profit forecasts for SIA by 48 to 86% across the fiscal years 2024 to 2026.

Consequently, the price target for SIA has been raised to S$6.91, up from the previous S$5.47, taking into account the boosted core earnings per share (EPS) and a price-to-book multiple of 1.2 times. This reflects an upside of c.6.5% as of 17 Jan 2024 mid day price.

The price target for SIA has been raised to S$6.91, up from the previous S$5.47, taking into account the boosted core earnings per share (EPS) and a price-to-book multiple of 1.2 times. This reflects an upside of c.6.5% as of 17 Jan 2024 mid day price.

This stands at two standard deviation points above the stock's mean and is marginally higher than the previous valuation multiple of 1.15 times, as highlighted by analyst Raymond Yap in a report dated Tuesday, January 9.

Yap anticipates that SIA's robust performance in the third quarter will be fueled by impressive passenger load factor data observed in October and November 2023. He further expects this trend to continue into December, driven by the peak travel season at year-end.

According to CGS-CIMB's forecast, a "bumper" S$0.40 final dividend per share is expected, implying a noteworthy 6.2 percent yield. Yap commented that this yield is "very good for a six-month holding period."

He also foresees an increase in the group's cargo load factor (CLF) to 59 percent in December 2023, driven by robust e-commerce trade between China, Europe, and the US during the seasonal peak.

Yap expressed positive surprise at SIA's strong cargo performance in the final months of 2023, pointing to higher freight tonne-kilometre figures and an increased CLF percentage in the October-November 2023 period compared to previous months.

In Yap's perspective, SIA's results could receive an additional boost from lower jet fuel prices, which have declined since their peak in mid-September 2023.

SIA's results could receive an additional boost from lower jet fuel prices, which have declined since their peak in mid-September 2023.

"We estimate that SIA’s all-in jet fuel price for Q3 FY2024 may still increase to US$114 per barrel (bbl) from Q2 FY2024’s US$98/bbl, assuming a one-month contractual price lag compared to spot prices – but may fall to about US$100/bbl in Q4 FY2024 if current jet fuel spot prices remain at US$100/bbl for the rest of this quarter."

Summary

In the upcoming period, Singapore Airlines expects the strong demand for air travel to persist throughout 2024, with strong sales expected across all markets for both leisure and business travel, spanning all cabin classes. Additionally, the company foresees enhanced financial performance due to strong cargo operations and reduced jet fuel consumption. These factors contribute to the airline's potential appeal as an investment, making it an attractive option for investors seeking to include the national carrier in their portfolios.

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