UOB Kay Hian (UOBKH) has downgraded its call on Singapore Airlines : C6L -1.29% (SIA) from &ldquo hold&rdquo to &ldquo sell&rdquo while cautioning that the stock&rsquo s &ldquo very lofty&rdquo valuation may not be sustainable in the long run.

 

In a report released on Monday (Jun 19), analyst Roy Chen said SIA&rsquo s valuations are now &ldquo very stretched&rdquo with the stock trading at 1.58 times price-to-book (PB) ratio for FY2024 estimates, which is pegged at 2.8 standard deviation above SIA&rsquo s long historical mean of 1.08 times since 2005.

 

This current PB ratio of 1.58 times has not been seen for the last 10 years, but matches SIA&rsquo s historical high in October 2007 prior to the global financial crisis, observed Chen. 

 

He also noted that SIA&rsquo s share price recently rose 31.6 per cent following the release of its FY2023 results.

 

In Chen&rsquo s view, some regional fund flows from the three major Chinese airlines have also contributed to the airline&rsquo s recent share price surge.

 

Despite the downgrade to &ldquo sell&rdquo , UOBKH&rsquo s target price for SIA has been raised to S$7.07 from S$5.75 as Chen expects earnings growth from the airline to continue, albeit at a slower pace.

 

The new target price is based on 1.44 times PB ratio for FY2024 estimates, which is pegged at two standard deviation above SIA&rsquo s historical mean. 

 

Chen added that even though SIA&rsquo s profitability could slow in FY2024 due to declining cargo yields, weaker cargo volume and moderated passenger yields, he believes overall core earnings could still be sustained with stronger-than-expected operational data.

 

Chen forecasts SIA&rsquo s Q1 2024 net profit to hit the range of S$600 million to S$700 million, compared to the net profit of S$602 million in Q4 2023 and S$370 million in the corresponding period last year.

 

Although a potentially weaker macroeconomic environment may dampen air travel and cargo demand, Chen believes the group&rsquo s near-term bottomline would continue to be supported by a slower-than-expected catch up by SIA&rsquo s regional competitors, as well as lower jet fuel prices. 

 

Other factors that may have contributed to SIA&rsquo s earnings include SIA&rsquo s branding, strong management track record and operational excellence, said Chen. UOBKH also feels that Singapore&rsquo s handling of the pandemic has led to greater recognition by the global community and an influx of wealth from the region into Singapore, which ultimately benefits SIA.

 

The analyst is raising his forecasts of SIA&rsquo s net profit by 10 per cent to S$2.87 billion in FY2024 31 per cent to S$1.24 billion in FY2025 and 10 per cent to S$1.04 billion for FY2026. 

 

His FY2024 estimate has also taken into account the one-off accounting gain of S$1.11 billion from the Air India-Vistara merger. 

SHARES in Singapore Airlines (SIA) : C6L -1.77% closed 1.8 per cent down at S$7.77 on Friday (Jun 16), ending its 12-day winning streak.

 

About 41 million shares changed hands. No married deals were recorded, data platform ShareInvestor indicated.

 

By contrast, the Straits Times Index was up 0.5 per cent to 3,260.03 points, led by gains in large-cap companies including Thai Beverage, Genting Singapore and Sats.

 

This comes as the airline on Friday refuted a media report saying it may raise its stake in Air India to create a bigger full-service national carrier for India.

 

Reuters reported that SIA&rsquo s statement is in response to a report by Indian newspaper Mint, which said the carrier had expressed its desire to gradually raise its stake in the Indian airline to about 40 per cent.

 

&ldquo The Mint story dated Jun 16, 2023, is incorrect. There (is) no change in SIA&rsquo s position from the November 2022 announcement,&rdquo SIA said.

 

Meanwhile, recovery in air travel appears to have served Singapore&rsquo s national carrier well it reported on Thursday that, together with its budget carrier Scoot, it served 2.8 million passengers in May &ndash a year-on-year increase of 65.8 per cent.

 

SIA attributed this to a strong demand for air travel, noting that passenger traffic and load factors were &ldquo robust&rdquo across all route regions. 

 

The airline&rsquo s share price closed higher for 12 consecutive days from May 29. Analysts from Morgan Stanley believe such gains could signify that the positives have been priced in.

 

They downgraded SIA from &ldquo overweight&rdquo to &ldquo even-weight&rdquo in a report on Friday, with a revised target price of S$7.30, noting that the counter had risen 43 per cent year to date and 34 per cent on the month. 

 

&ldquo Although we argued for re-rating as part of our prior overweight thesis, this looks played out, and we move to even-weight,&rdquo said the analysts. 

 

They also switched their valuation framework from price-to-book ratio to enterprise value against earnings before interest, taxes, depreciation, and amortisation, on the belief that this would better capture its profitability outlook post-pandemic. 

 

However, further upside for the stock could be driven by favourable flows, earnings upgrades, and/or valuation re-rating, said the analysts.

 

Assuming cargo yields stabilise at current levels and costs remain well-controlled, SIA&rsquo s earnings could grow 15 per cent in FY2024, they added. 

 

In such a scenario, the stock could continue to re-rate, giving rise to a &ldquo bull case&rdquo of S$9.30, they said. Morgan Stanley has forecast SIA&rsquo s FY2024 net profit at S$1.9 billion.