Excerpts from OCBC Investment Research report

Singapore Airlines (C6L.SI)

Singapore Airlines (SIA) 1QFY25 (financial year ending 31 Mar 2025) revenue grew 5.3% year-on-year (YoY) on capacity increase, but net profit tumbled 38.5% YoY as higher fuel costs resulted in margin erosion.
Passenger and cargo yields are likely to continue to moderate as capacity increases, though supply chain constraints and Red Sea tensions could result in more gradual normalisation

Revise fair value (FV) estimate to SGD6.84; risk-reward is now less attractive, in our view

SIA reported a 5.3% YoY increase in 1QFY25 group revenue to SGD4.7b

Passenger flown revenue rose 4.1% YoY to SGD3.8b on a 12.2% increase in capacity, notwithstanding a 4.6% decline in yields. Passenger traffic grew at a slower 9.7% YoY, translating to a 2 percentage point (ppt) drop in passenger load factor (PLF) to 86.9% during the quarter.

Meanwhile, cargo flown revenue slipped 0.2% YoY to SGD541m.

Increased demand for air freight from eCommerce as well as tensions in the Red Sea supported a 5.9 ppt increase in cargo load factor to 57.7%, partially offsetting a 19.1% decline in cargo yields as recovery in bellyhold cargo capacity continued.

Group expenditure outpaced revenue growth during the period, up 14% YoY to SGD4.2b

Singapore Airlines non-fuel expenses were manageable, expanding 7.7% YoY as compared to the overall 11.6% increase in capacity (passenger: +12.2%; cargo: +10.7%), even after taking into account new rates from a freshly inked contract with SATS.

Fuel costs, however, rose 30.1% YoY due to higher volume uplift, higher fuel prices, and lower hedging gains – and was the main detractor of margin performance this quarter, in our view.

Consequently, operating profit and net profit moderated 37.7% and 38.5% YoY to SGD470.2m and SGD451.7m, respectively. SIA’s 1QFY25 revenue and PATMI came in at 24.8% and 26% of our initial full year forecast, respectively.

Revise FV estimate to SGD6.84

SIA’s share price came under pressure on 1 Aug 2024 after its 1QFY25 results missed consensus expectations and its shares also started to trade ex-dividend.

Although management guided that travel demand is expected to remain healthy in the upcoming months, it continues to caution that passenger yields will moderate as more capacity enters the market, notwithstanding delays in aircraft delivery and longer maintenance turn times due to supply chain disruptions.

On the cargo front, yields will continue their downward trajectory albeit at a potentially gradual pace as geopolitical tensions support demand for air freight.

All things considered, we make some minor adjustments to our forecasts. We also lower our target price-to-book (P/B) ratio to 1.2x, in line with half a standard deviation (s.d.) above the rolling 5-year historical average at the time of writing.

As a result, our FV estimate slips from SGD7.53 to SGD6.81.

As Singapore’s flagship carrier, Singapore Airlines (SIA) posted a record performance for FY24 on the back of robust travel demand and its sustained lead in capacity post-reopening.

We think that SIA is nearing the end of the runway for exceptionalism, given that passenger yields are likely to have peaked and are on a moderating trajectory as other airlines progressively return capacity to the market, especially in the region.

Nonetheless, we remain confident that SIA’s brand proposition, service quality and product innovation will allow it to navigate the transition from recovery to growth going forward.

In our view, SIA continues to hold long-term value in investors’ portfolios, notwithstanding near-term share price volatility