SGX Stocks and Warrants

Author: kimeng   |   Latest post: Wed, 25 Nov 2020, 11:41 AM


Singapore Airlines: Travel Demand Hit Hard by COVID-19

Author:   |    Publish date:

  • 50% cut in capacity till end-Apr
  • Further reductions possible should COVID-19 escalate
  • Cautious on earnings outlook

COVID-19 Spread Intensified Across the Globe

Singapore Airlines (SIA) announced further reductions in capacity, due to weaker demand across the group’s networks and wider border controls amid the COVID-19 outbreak. As of 17 Mar, COVID-19 has spread rapidly to over 150 countries with more than 190,000 confirmed cases globally.

WHO declared COVID-19 a global pandemic due to its rapid and wide transmission and severity. More than 65 countries across the globe have imposed travel restrictions or lockdown of the countries to combat the spread of COVID-19.

Further Reductions in Capacity Amid Weak Demand and Wider Border Controls

Till date, SIA has announced six rounds of capacity cut since February. With the latest reductions announced, the group has temporarily cut a total of 50% of its capacity from its network till end-April. Notably, the latest announcement saw a sharp increase of 34.4 percentage points from the last announcement on 12 March, underscoring the severity and escalation of the COVID-19 situation. Management highlighted the possibility of more reductions in future and to be “prepared for a prolonged period of difficulty”.

Rigorous Cost-management

SIA has been proactively looking at ways to control costs. Senior management and board members will take a 5-15% cut in salary to reduce staff costs. SIA also announced a voluntary no-pay leave scheme for staffs below senior management level to reduce manpower costs. Moreover, SIA is discussing with suppliers to get discounts and revisit the repayment schedule including the deferrals of aircrafts prepayment.

Management noted that SIA is currently in discussion with the banks to secure more lines of credit to make sure that they have enough cash to meet near-term liquidity requirement. Management noted that the banks have been supportive thus far. We note that SIA’s balance sheet remains stable with ~52% of net gearing ratio and S$1.5-2b of un-drawn credit lines.

SIA is trading at 0.6x P/B, 26% lower than the GFC lows. While valuations look attractive, we would continue to see volatility ahead, growing pressure on load factors and yields. As such, we remain cautious on SIA and would watch out for signs of stabilisation, e.g declining trend of new COVID-19 cases before reviewing our rating.

We update our cost assumptions and pare our earnings forecast for FY20/21F by 55% and 39% respectively to take into account the impact of COVID-19 which is likely to last longer till 3QFY21. After adjustments, our fair value estimate decreases from S$9.90 to S$6.60.

Source: OCBC Research - 20 Mar 2020

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