Analysts are more negative on Singapore Airlines C6L 0.16% (SIA) following the group&rsquo s record-breaking 1HFY2024 ended Sept 30 results.

 

On Nov 7, SIA announced that its 1HFY2024 net profit came in at $1.44 billion, a 55.5% improvement y-o-y, spurred by robust demand for air travel through the Northern-summer travel season and a rebound in passenger traffic to North Asia.

 

Following the promising set of results, CGS-CIMB Research and PhilipCapital have kept their &ldquo reduce&rdquo calls while Citi Research has kept its &ldquo sell&rdquo call. CGS-CIMB has lowered its target price to $5.47 from $5.66 previously, PhilipCapital has lowered its target price to $5.45 from $6.80 and Citi has maintained its target price at $6.54.

 

In his Nov 8 report, CGS-CIMB&rsquo s Raymond Yap noted that the group&rsquo s 2QFY2024 core net profit of $684 million was in line with the analyst&rsquo s forecast of $600 million to $650 million. 

 

He writes: &ldquo The 2QFY2024 earnings before interest (ebit) of $799 million was 5.9% higher than 1QFY2024&rsquo s $755 million, but we believe that after stripping out foreign exchange (forex) gains, the 2QFY2024 ebit may actually be lower than the immediately-preceding 1QFY2024.&rdquo

 

The analyst adds that SIA group&rsquo s individual airlines&rsquo operating metrics appear to suggest as such.

 

He points to SIA&rsquo s core ebit excluding ancillary items and forex effects, which fell 18% q-o-q to $500 million in 2QFY2024, while Scoot&rsquo s core ebit fell 24% q-o-q to $9 million. The group&rsquo s cargo core ebit also fell 97% to $2 million. 

 

&ldquo All were affected by the rise in jet fuel prices compared with 1QFY2024, but the cargo business was also impacted by the 9% q-o-q drop in revenue per available seat kilometre capacity (RASK) due to excess global airfreight capacity, while Scoot saw its RASK fall 3% q-o-q as it expanded into less-lucrative routes. Only SIA managed to eke out a 0.5% q-o-q rise in its RASK during 2QFY2024, but this was a major deceleration compared with the 9% q-o-q jump during 2QFY2023,&rdquo notes Yap.

 

He adds that SIA group&rsquo s revenue passenger kilometre (RPK) demand growth also slowed, showing less than 5% q-o-q growth in 2QFY2024 as compared to its 16% q-o-q growth in 2QFY2023. 

 

Similarly, Scoot showed a lacklustre 8% q-o-q growth in 2QFY2024 as compared to 55% q-o-q growth in 2QFY2024.

 

Yap writes: &ldquo Passenger load factor (PLF) at SIA and Scoot remained very high y-o-y, but declined between 30 basis points (bps) to 70 bps q-o-q.&rdquo

 

The analyst anticipates potential PLF and &ldquo yield pressure&rdquo for the SIA group in calendar year (CY) 2024, as its competitors gradually catch up in terms of their capacity restoration.

 

&ldquo SIA had a first-mover advantage throughout CY2022 and into CY2023, which successfully captured the explosion of revenge travel, but the dividends to SIA group are dwindling as revenge travel abates and cost of living pressures impact discretionary travel demand at the margin,&rdquo notes Yap.

 

He adds that these &ldquo trends&rdquo could eventually curb SIA group&rsquo s yields and its ability to pass on higher fuel costs.

 

Spot jet fuel prices averaged US$92 ($125) a barrel (bbl) in April to June, US$110/ bbl in July to September, eventually reaching US$114/ bbl since Oct 1.

 

Yap notes that if oil prices stay high, it could put pressure on SIA&rsquo s cost per available seat capacity (ASK) in 2HFY2024 and FY2025.

He adds: &ldquo None of the above pressure points will derail SIA&rsquo s strong FY2024, in our view, as its 1HFY2024 core net profit already exceeded 1HFY2023 by 66%, sp we expect SIA to deliver core net profit of $1.9 billion in FY2024, which is virtually the same as FY2023.&rdquo

 

The analyst also expects an FY2024 dividend per share (DPS) of 35 cents, which is almost the same as FY2023&rsquo s 38 cents. 

 

&ldquo However, stock prices look ahead and we see somewhat overcast skies for SIA, beginning from 2HFY2024,&rdquo concludes Yap.

 

Potential de-rating catalysts by the analyst include cost inflation, slowing demand growth, and rising competition, while upside risks include the potential for SIA to outperform assumptions for yield, PLF and other revenue metrics as passenger demand likely remains strong until the Lunar New Year.

 

Meanwhile, PhilipCapital analyst Peggy Mak writes that SIA group&rsquo s cargo remains a &ldquo weak spot&rdquo , to which she attributes to weaker global trade flows and larger capacity added from the return of passenger flights.

 

She adds that cargo yield has fallen 46.2% to 41.8 cents per load. &ldquo This is, however, still higher than the pre-Covid amount of about 31 cents,&rdquo writes Mak.

 

On the group&rsquo s outlook, the analyst observes that heightened competition from restoring capacity mainly from north Asian airlines and a fading off of leisure travel will put pressure on the SIA group&rsquo s yields, while jet fuel prices trend higher along with higher crude oil prices. 

 

&ldquo We expect capital expenditure (capex) spending to rise in 2HFY2024 to meet its target of $2.3 billion for FY2024 (1HFY2024: $648 million). It would also incur a cash outlay of $5.1 billion in FY2024 for the redemption of mandatory convertible bonds (MCB)s and $600 million for convertible loans. This would lower interest income in 2HFY2024,&rdquo notes Mak.

 

Lastly, Citi analysts Kaseedit Choonawat, Amy Han and Eric Lau ​ ​ understand that key upside risks for the SIA group include a potential for ticket price reacceleration against the industry&rsquo s capacity recovery, although anecdotal evidence has been rare. 

 

Other upside risks include a price decline in fuel and improvements in the European geopolitical situation leading to lower inflation pressure and the further fall out of Asean competitors, Air India turning significantly profitable where SIA takes on greater stakes beyond 25% of merged entity and lastly, the market willing to reduce the risk-premium of SIA group as its stock incrementally becomes a more direct proxy of Singapore tourism.