3 Reasons Why SIA is Overbought

Today I'm gonna play devil's advocate and give 3 reasons why I think we'll see the growth in $SINGAPORE AIRLINES LTD(C6L.SI)$ price to start slowing down, and even to eventually track back towards $7.

Price above Bollinger Upper hand, and both RSI6 & RSI12 close to or greater than 90

1) Declining Cargo revenue

[16 Mar 2023] IATA has said air shipment traffic tilted down 8% during 2022 from the prior-year record and was 1.6% less than before the COVID crisis. It predicts air cargo volumes will fall further this year to 5.6% below 2019 levels.

This was said in March this year. And we see it reflected in the latest financial report too.

Cargo revenue FY21/22: $4,339.4M

Cargo revenue FY22/23: $3,603.8M (-17.0% y-o-y)

The most recent quarter, Q4 2023, also "boasts" the worst cargo revenue over the past 2 FYs.

Some might argue that cargo revenue is less significant than passenger revenue today, but a declining revenue will definitely erode profit margin, because the costs of getting the planes to the air don't change. Less cargo = less profit. Others might also argue that the AI and semiconductor boom will help buoy the demand for air frieght, but my second reason will address that.

2) Slowing global economy, Recession looming

[2 Jun 2023] Latest statistics from Singapore's Economic Development Board showed that manufacturing output continued to weaken in April 2023, declining by 6.9% y/y and by 1.9% month-on-month (m/m).

Despite the bullish US market, we still continue to see signs of a weakening economy, and a stubborn inflation. The Fed has made it quite clear that between a recession and a runaway inflation, they will always choose a recession.

Knowing this, I foresee a slowdown in the second half of this year in passenger revenue too. In fact, this was also alluded to in SIA's recent earnings as an outlook that SIA is preparing for.

SIA Group FY22/23 Full Year Results Media Briefing Slides, Slide32

This slowdown will clip the wings of SIA's growth, and we should temper our bullishness as well in line with that.

3) Oil Price will increase 2H 2023

[5 Jun 2023] Saudi Arabia will make a deep cut to its output in July on top of a broader OPEC+ deal to limit supply into 2024 as the group seeks to boost flagging oil prices.

OPEC+ cutting output to limit supply will definitely affect oil prices, and increasing oil prices will eventually translate to higher costs for SIA. In fact, it is kudos to SIA hedging of fuel costs to manage to reap the profits they've been getting to date.

Coupled with escalating aggression in the Ukraine-Russia conflict, I expect fuel prices to go up and stay up, further eroding profits for the group.

One more thing... ☝🏼 

This is not to say that SIA is a bad buy. On the contrary, especially if you're intending to hold for the long term, there isn't a better time to buy than now! But for the immediate few months, I think the surge of prices is done and we should see more realistic expectations tamper investors appetite soon.

Disclosure: I'm holding SIA long, a happy problem 😂

Using DLC as a hedge for when the price drops. It's not looking too good at the moment 😅