Singapore Air Earnings: Record-High Fiscal 2023 Net Profit Within Expectation; Lift FVE to SGD 6.10

No-moat Singapore Airlines C6L delivered a record-high net profit of SGD 2.2 billion for fiscal 2023 ending March, in line with our expectations. SIA definitely benefited from having a relatively intact flight crew and a healthy balance sheet able to capture the rebound in travel demand. We push back assumptions of a normalization in passenger yield and load factor into fiscal 2025, lifting our earnings estimates. However, our thesis that competition will resume is unchanged as airlines add capacity and we expect SIA’s operating margin to decline to a midcycle 5.1% in fiscal 2028, from 15.6% in fiscal 2023. Our midcycle margin forecast is close to SIA’s 2005-20 average. Our fair value estimate rises to SGD 6.10 from SGD 5.30. We continue to prefer greater upside potential from its current share price before buying the shares, but near-term performance should remain supportive for its share price.

The primary driver for the uptick in our fair value estimate is higher capacity based on management guidance of 90% of prepandemic capacity by the end of fiscal 2024. We also push back the decline in passenger load factor by nine months mainly due to a slower resumption of international routes by the Chinese airlines, which we think may benefit SIA, as it limits competition. The new assumptions deliver a top-line forecast of SGD 19.9 billion, an 11.8% year-over-year increase, with strong passenger performance offsetting weaker cargo yields.

In addition, our fair value estimate is little affected by its mandatory convertible bond redemption. We already expected SIA to fully redeem its MCBs to prevent potential dilutive equity effect, and its recent 50% redemption is a sensible action given the step up in debt cost and since SIA no longer needs cash to supplement its working capital and capital spending.