• The opening up of the transatlantic travel market is the most significant development for international air travel since the start of the pandemic. This will pave the way for improved connectivity to other destinations. However, much of Asia, including Australia, still operates under travel restrictions.
• In valuing Singapore Airlines (SIA, SGX:C6L), we have factored in a traffic recovery and have pegged valuation at 1.15x FY22/23 average adjusted book value.
• Maintain HOLD.

What's New

• SIA's share price rises by 3.5%, following an announcement that the US will open borders for vaccinated travellers from November. Transatlantic travel between the US and Europe is the key focus but foreign travellers from most other countries, including China, would be allowed. The move will also facilitate hub connectivity to other destinations in Asia. It will also lead to greater pressure on China, a key market for air travel, to ease travel restrictions. However, the general opinion is that China will be cautious in easing cross border travel ahead of the Beijing Winter Olympics in Feb 22, due to imported COVID-19 infections.
• Still, the move is a clear boost for international travel and IATA terms this as “a key shift in managing the risks of COVID-19 from blanket considerations at the national level to assessment of individual risk”.

How Will Fares Fare With the Formation of Vaccinated Travel Lanes (VTL)?

• Singapore announced a VTL with Germany and Brunei without line with SIA’s own guidance for normalisation of pax yields.

Cargo Is Still Expected to be a Key Earnings Driver for 2QFY22 and Potentially 3QFY22

• Despite increasing capacity by 29% q-o-q in 1QFY22, SIA’s pax barring a decline in yields, we still expect cargo to the main earnings driver which should contribute to a sequential reduction in losses.

SIA - Glass Is Half Full or Half Empty?

• 19 months after COVID-19 first made headlines, SIA’s pax traffic for August is still just 6.8% of perspective, SIA's share price is trading at close to 1.2x FY22’s adjusted book value, which is 30% higher than pre-pandemic levels.

SIA - Valuation & Recommendation

• No changes to our earnings assumptions. Maintain HOLD rating on SIA with a fair book value.

• Catalyst: Gradual relaxation of travel restrictions.

Source: UOB Kay Hian Research - 22 Sep 2021