SIA remains suppressed since ratings downgrade

• Singapore Airlines Ltd (SGX: C6L) share price have fallen as much as 3.6% in the last one week
• CIMB cut its rating on the stock to ‘hold’ from ‘add’, citing that SIA shares are now trading close to pre-Covid prices
• However, they raised target price to S$6 a share, predicting that full-year FY2022 BVPS will grow by 9% on fuel gains
• Prior to this, SIA shares have been rising, thanks to positive aviation developments
• Trade SIA shares, long or short, with an IG account

Why CIMB downgraded SIA rating to ‘hold’

Shares of Singapore Airlines have (SIA) fallen close to 4% since CIMB downgraded its rating on the stock a week ago.

CIMB analyst Raymond Yap lowered his call on SIA’s share price to ‘hold’ from ‘add’, in a note titled ‘Time to take profit?’ on 18 March 2021.

His rating is based on the fact that the airline’s stock price was ‘merely 11% shy of its high of S$6.42 on 02 January 2020, just prior to the outbreak of Covid-19’.

However, he raised his target price to S$6 a share, on the prediction that the company’s full-year FY2022 adjusted book value per share (BVPS) estimate will grow by 9% on fuel derivative gains.

He also raised his forecast on the stock’s price-to-book value (P/BV) multiple from 0.94 times to 1.06 times.

‘The latter historical P/BV multiple is one standard deviation above the mean since 2011, vs. the mean previously, to reflect investors’ willingness to pay for recovery plays,’ he wrote.

Upside risks to this price estimate include a potential quarterly profit for SIA in the fourth quarter of FY2021 due to mark-to-market (MTM) fuel gains, ‘very strong cargo demand’ in the same quarter due to the Lunar New Year rush, and ‘meaningful’ border reopening from the third quarter of FY2022.

On the flipside, the long road to full demand recovery may temper investors’ expectations and pose downside risks to SIA’s share price, Yap said.

SIA could realise mark-to-market fuel gains in Q4

Brent crude prices have risen ever since OPEC+ decided to substantially carry over March production cuts into April 2021 on 04 March.

Saudi Arabia’s commitment to another month of voluntary production cut by one million barrels until April also drove oil prices higher.

‘While higher oil prices are usually negative for SIA under normal operating conditions, SIA had over-hedged its jet fuel requirements for FY21F and FY22F,’ Yap wrote.

‘Hence, SIA will book realised MTM profits in its 4QFY21F profits and losses from its fuel derivatives that mature in 4QFY21F, as the derivative strike prices of about US$60/barrel (bbl) are below the current Brent oil price of US$67-68/bbl.’

In light of the MTM fuel derivative gains, he sees SIA’s FY2021 full-year core loss per share narrowing by 9.7%.

Meanwhile, for the yet-to-mature fuel derivatives for FY2022 to FY2025, CIMB expects SIA to book MTM gains into its FY21F balance sheet reserves with respect to the actual hedges against its expected future jet fuel consumption.

‘As a result of this, we raise our FY22F adjusted BVPS estimate by 9% to account for fuel derivative MTM gains, reflecting current forward average Brent prices of US$65/bbl for FY22F, US$61/bbl for FY23F, US$58/bbl for FY24F, and US$57/bbl for FY25F,’ Yap concluded.

Positive developments for airline industry

Yap also noted that SIA’s share price rose sharply in recent weeks as investors priced in the optimism arising from ongoing global Covid-19 vaccine rollouts.

He added that the market ‘appears to have ignored the slower-than-expected pace of vaccinations in the Europe Union and blood-clotting issues with the AstraZeneca vaccine’.

SIA shares also rallied nearly 9% after Singapore’s foreign ministry said it is working with the Australian government to establish an all-purpose air travel bubble by the middle of this year.

The air bubble will allow vaccinated residents of both countries to travel to and fro without needing to be quarantined.

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