• The roll-out of COVID-19 vaccines may boost Singapore Airlines’ cargo volumes, gradually restore pax travel and deliver fuel mark-to-market gains to the P&L and B/S.
• For these reasons, we cut our loss estimates and raise our Singapore Airlines target price to S$4.91 on P/BV of 0.94x (mean since 2011) against the end-FY22F adjusted BVPS.
• Reiterate ADD as the positive newsflow momentum is just beginning.

SIA’s Cargo Volumes to Benefit From COVID-19 Vaccine Shipments

• IATA estimated on 9 Sep that just delivering one dose of the COVID-19 vaccine to 7.8bn people globally may require 8,000 747 freighters, or 975k doses per plane.
• We estimate that, globally, there are about 1,000 747-equivalent dedicated freighters, which must bear the burden of vaccine transportation given that passenger planes are still mostly parked.
• Delivering one vaccine dose to 20% of the world’s population by end-CY21 may provide the 1,000 747-equivalent freighters an extra 1.6 trips over the next 12 months, rising to 3.2 trips if two doses are required.
• It is important to remember that vaccine deliveries are in addition to all the usual cargoes carried by airfreight and come at a time when container spot shipping freight rates are at all-time highs. In other words, the airfreight of vaccines, which will likely begin from late-CY20 or early-CY21, could help bolster Singapore Airlines (SGX:C6L)’s cargo volumes and support airfreight rates at higher levels for longer.

Higher Fuel Prices to Reduce Mark-to-market (MTM) Derivative Losses

• Optimism about the potential for COVID-19 vaccines to restore demand for transportation fuels has pushed up Brent crude oil prices close to US$50/bbl from its Apr low of US$17/bbl and the 30 Sep close of US$41/bbl. Oil markets were also positive about the decision by OPEC+ to taper its crude oil output cuts by only 0.5 million barrels per day (mbpd), compared to the earlier target of 2 mbpd.
• Higher Brent crude oil prices will likely result in Singapore Airlines booking in MTM fuel derivative gains on its FY21-22F over-hedged position to its 3QFY21F P&L (Oct-Dec 2020), and MTM gains to its end-Dec 2020 B/S reserves for its effective fuel hedge positions up to FY25F. The potential MTM gains on the P&L will help Singapore Airlines deliver a narrower sequential core net loss during 2HFY21F compared to the 1HFY21 level as well as boost its book value per share, ceteris paribus.
• While higher spot fuel prices will cause Singapore Airlines to pay more for the fuel that it actually uses, the extra cost will be more than offset by the reduction in fuel derivative losses because Singapore Airlines is in an over-hedged position for FY21-22F.

Adjusting Up Passenger Load Factor Assumptions

• Previously, we had assumed that Singapore Airlines would deploy 45% of its pre-COVID-19 capacity in FY22F. In this report, we revise this down to 35% because Singapore Airlines disclosed recently that it expected to deploy 16% of its pre-COVID-19 passenger airline capacity by Dec 2020 and rising to 50% by Dec 2021, which averages 33% over CY21. However, we have not changed our already very-modest revenue passenger kilometres (RPK) demand assumptions, leading to higher load factor forecasts and reduced core net loss forecasts for the Singapore Airlines.

SIA Target Price Computation

• Our target price of S$4.91 is based on an unchanged target P/BV multiple of 0.94x (mean since 2011), applied to the end-FY22F adjusted BVPS.
• To derive our BVPS forecasts, we have assumed that Singapore Airlines will raise a further S$6.2bn in mandatory convertible bonds (MCBs) in FY22F, in addition to the S$3.5bn of MCBs issued on 8 June 2020.
• Our adjusted BVPS calculation treats half of the MCB as debt (although the accounting treatment sees it as wholly equity) because we have assumed that Singapore Airlines will endeavour to redeem half of the MCBs before their 10-year maturity or will refinance them using other sources of debt.
• Potential rerating catalysts include stronger-than-expected recovery in passenger traffic following a quick containment of the global COVID-19 pandemic once vaccines are available next year and higher-than-expected cost savings at the Singapore Airlines as a result of urgent efforts to contain costs.
• The Singapore Airlines disclosed recently that it expected to deploy 16% of its pre-COVID-19 passenger airline capacity by Dec 2020 and 50% by Dec 2021.

Source: CGS-CIMB Research - 7 Dec 2020