• SIA’s bottom line is likely to see a substantial improvement in FY23, driven by the expected progressive travel recovery and helped by a significant fuel hedging gain.
• While we are optimistic that SIA’s business is due for a full recovery by FY25, we note that its costly MCBs issued at the height of the pandemic have to be redeemed first before the earnings recovery can deliver meaningful value accretion to shareholders.

SIA's Net Losses to Narrow Significantly in FY23

• We believe Singapore Airlines (SIA, SGX:C6L)’s bottom line is in for a substantial improvement in FY23 (we are forecasting a slight loss of S$28m in FY23 vs about S$1.05b in net loss in FY22), driven by:
  • a progressive recovery in SIA’s passenger business, in line with Singapore’s push towards an economic reopening; and
  • a significant fuel hedging gain of over S$1b due to its 40% fuel hedge level throughout FY23 and the recent sharp rise in fuel prices (current Brent crude oil spot price at about US$119/bbl vs SIA’s average hedge cost at US$60/bbl).

Capacity Growth to Lead Pax Volume Recovery

• SIA has adopted a proactive capacity re-activation strategy – a route/flight will be re-activated as long as the operation is cash flow positive. While this strategy will help SIA secure and grow its market share against competitors’ during the recovery, it also means that the recovery in SIA’s core operating profit would be more backend loaded (i.e. in FY24-25), as operating costs (capacity driven) would run relatively faster than pax revenue (pax volume driven) in the early phase of the recovery (i.e. FY23).
• We project SIA’s net profit to rebound to S$338m and S$728m in FY24 and FY25 respectively, forming 50% and 107% of the pre-pandemic (FY19) level.

Better to Redeem MCBs Early Than Late

• Operational improvement aside, we see redemption or no redemption (i.e. MCBs get converted) would lower our DCF valuation by up to 17.2%.

Re-initiate Coverage on SIA With HOLD

• We have switched to DCF sentiment towards SIA in the medium term.
• Downside risks include any event that disrupts SIA’s recovery (e.g. a more infectious/fatal COVID-19 variant leading to rollback of the global economic reopening).

Source: UOB Kay Hian Research - 28 Mar 2022