PhillipCapital analyst Peggy Mak has re-initiated coverage on Singapore Airlines C6L 0.00% (SIA) with a &ldquo reduce&rdquo call and a target price of $6.80.

 

In her June 22 report, Mak notes that SIA may have enjoyed an &ldquo exceptional&rdquo year for the FY2023 due to its first-mover advantage, its tapering passenger yields and load factors may cause the airline&rsquo s FY2024 and FY2025 net profit to decline by 24% and 46% respectively.

 

In addition, the airline will see net cash outflow in FY2024 as it will have to spend $3.35 billion to partially redeem its second tranche of mandatory convertible bonds (MCBs) in June. SIA will also have to spend on renewing its fleet of aircraft as well as expand and invest around $360 million in the merged Vistara/Air India group, notes Mak. SIA owns a 49% stake in Vistara.

 

That said, the potential merger of Vistara and Air India will yield the airline a non-cash accounting gain of $1.1 billion as it writes back its investment in the former.

 

&ldquo The enlarged entity will have a dominant share of 23% each of domestic and international passenger traffic in India. However, on a pro-forma basis, it is still in net loss of $1.02bn in 1HFY2022/2023. With a 25.1% stake, SIA would recognize its share of profit or loss,&rdquo writes Mak.

 

Mak&rsquo s target price is based on an FY2024 book value per share of 1.1x.

 

&ldquo We expect SIA to deliver sustainable return on equity (ROE) of 8%, from which we derived a target price to book of 1.1x at cost of equity (COE) of 7.0%,&rdquo she says.

 

As at March 31, the group has 195 aircraft (comprising 188 passenger aircraft and seven freighters) in its operating fleet. SIA itself has 133 passenger aircraft and seven freighters while its low-cost carrier arm, Scoot, has 55 passenger aircraft. The group currently has 100 aircraft in its order book.