Singapore Air Earnings: Lifting Valuation After Another Strong Year Supported by Forward Bookings

We lift no-moat Singapore Airlines’, C6L or SIA’s, fair value estimate to SGD 7.20 from SGD 6.10 following its strong first-quarter fiscal 2024 (ending March) results and anticipated upside to free cash flow with working capital normalizing faster than expected. We now expect fiscal 2024 operating margin to be relatively stable at 14.9% versus our original 13.9% estimate. First-quarter revenue of SGD 4.5 billion, up 14% year over year, is tracking at a faster pace that our previous growth forecast of 11.8%. The first quarter is normally the weak travel demand season. Hence, based on forward bookings, we expect SIA to continuously ride on China’s reopening, and strong summer holiday travel demand. However, we would wait for a more attractive entry price to buy the shares with trends pointing to increasing competition within the North Asia region, and soft cargo performance.

We now see revenue growing 13% in fiscal 2024 to SGD 20.1 billion driven by higher load factor assumptions. First, we raise the passenger load factor to 87.0 from 84.3, compared with its first-quarter PLF of 89.0, indicating a stronger-than-expected international travel rebound and a slower-than-expected industry capacity expansion. Amid challenges in aircraft deliveries globally, management maintains its previous capacity guidance unchanged. Second, we push back the cargo load factor even further to 51.0 from 60.0. The cargo performance has been sluggish for the past quarters. We see global growth headwinds lingering through March 2024.

We are optimistic about SIA achieving stable midteens operating margin. The rising inflationary costs in ground handling, salaries, and passenger costs are largely offset by declining jet fuel costs. In our view, SIA can enjoy fuel-hedging gains for the rest of the fiscal year as the five-year fuel hedge contracts it entered pre-COVID-19 are still effective.