Our SIA Expectations Unchanged, Uncertainty Rating Updated to Low Reflecting a More Stable Outlook

We keep our fair value estimate on no-moat Singapore Airlines C6L, or SIA, at SGD 5.30 following its third-quarter business update. SIA’s nine-month EBITDA of SGD 3,755 million makes up 74% of our full-year estimate with EBITDA margin around 60 basis points above our forecast. While the cargo segment is slightly weaker than we had assumed, we believe this will be made up by passenger demand that appears to remain firm. We are lowering SIA’s Morningstar Uncertainty Rating to Low from Medium given the improving visibility in travel demand. The low uncertainty rating is in line with SIA’s historical rating.

We continue to see SIA as being fully valued at its current share price level. We believe there is downside risk from weaker cargo demand, but the pace of addition in its China routes remains a positive. While SIA’s management states that approvals for more routes are pending, we are more optimistic that routes will increase in fiscal 2024, starting April 2023.

As estimated in our Jan. 17 note, based on SIA’s third-quarter operation statistics, SIA’s third-quarter operating margin continuously improved to 15.6% from 15.1% in the previous quarter. The nonfuel expenditure increased 15.5% quarterly to SGD 2.8 billion, but this was offset by a 13% drop in fuel costs as jet fuel prices moderated. The nonfuel costs are mainly driven by fair value adjustments from exchange loss under a strong U.S. dollar environment, which is a noncash expenditure. We maintain our full-year fiscal 2023 net margin at 12%.