SINGAPORE – Singapore Airlines (SIA) shares tumbled nearly 10 per cent on Feb 21 – a day after the carrier warned that higher fuel prices and increased operating costs could cloud its outlook.
The stock closed at $6.67, down 70 cents or 9.5 per cent, with 39 million shares traded.
Brokers said the market reacted negatively to the carrier’s higher-than-expected operating expenses in the last quarter of 2023 even though revenue growth remained solid.
Cargo business remains a drag, fuelling concerns that the return to normal may be slower than expected due to the conflict in the Red Sea.
However, Ms Ada Lim, an analyst at OCBC Investment Research, expects SIA to post a record performance for the financial year to March 31 on the back of robust travel demand and its ramp-up in capacity since major economies reopened after Covid-19.
“Regional airlines have struggled with manpower shortages and other operational issues, which may allow SIA to enjoy higher-for-longer passenger yields vis-a-vis pre-Covid levels,” Ms Lim said.
But whether people will spend more on travel depends on the economic outlook, and geopolitical tensions could pose further risks to oil prices and fuel inflation, she added.
“Nonetheless, we remain confident in SIA’s brand proposition and product innovation. In our view, SIA continues to hold long-term value in investors’ portfolios, although there could be some share price volatility in the near term ahead of the full-year results release,” Ms Lim said.
SIA released its third-quarter results on Feb 20, noting that the demand for air travel remained healthy.
Forward sales continued to be robust, underpinned by the demand for leisure travel during the school holidays and Easter peak in March and April 2024.
Passenger yields – an indicator of revenue – continued to come under pressure from increased competition.
“Heightened geopolitical tensions and economic uncertainty could also weigh on business sentiment and the demand for air travel. High fuel prices and inflationary pressures, as well as supply chain constraints, also present a more challenging operating cost environment globally for airlines,” SIA noted.
Net profit grew 4.9 per cent to $659 million in the three months to Dec 31, 2023, while revenue rose 4.9 per cent to $5.1 billion, an all-time quarterly high.
It also noted that net fuel costs after hedging climbed 9.1 per cent.
The demand for air travel was led by a rebound in North Asia as China, Hong Kong, Japan and Taiwan fully reopened.
SIA and Scoot carried 9.5 million passengers in the quarter, up 29.4 per cent year on year. Passenger traffic grew 19.1 per cent, outpacing the capacity expansion of 17.9 per cent. As a result, its passenger load factor – which indicates the capacity used – improved by 0.8 percentage points to 88.2 per cent.
In contrast, revenue from cargo flown fell 35.1 per cent from a year earlier to $559 million.
SIA expects air freight volume to soften in the seasonally weaker January to March quarter, with continued pressure on yields.
DBS Group Research said SIA’s results were disappointing, noting the sequential decline in its earnings before interest, tax, depreciation and amortisation as well as operating margins in a seasonally stronger quarter. Passenger yields for both SIA and Scoot also fell more rapidly than anticipated.
DBS expects SIA’s earnings to peak for the 2024 financial year as the carrier faces constraints in increasing capacity further and mitigating margin pressures.
Mr Ahmad Maghfur Usman, an analyst at Nomura, is keeping his buy recommendation on SIA, pegging the target price at $9.17 a share. He believes earnings per share will continue to grow, and that the stock is trading at a relatively cheaper level compared with pre-Covid-19.
The stock is also expected to offer an attractive dividend yield of 5 per cent for the 2024 fiscal year, he said.
