$SINGAPORE AIRLINES LTD(C6L.SI)$

Re-opening tailwinds continue

SIA's strong momentum will be augmented by 3 factors

1) Reopening of most of its key markets, including Japan, Taiwan, and Hong Kong - East Asia (including China) contributed 62% to topline in FY22 (59% in FY19)

2) Available capacity to add flights to meet the latent demand - High passenger load factor (87.4% at SIA's Group level in July; second highest in Group's history) and profitability may be maintained on the pent-up demand for these popular travel destinations

3) Capitalise as a "first-mover" with the eventual reopening of China - E.g., SIA has resumed weekly flights to Beijing, Fuzhou, Hangzhou, and added flights to Shenzhen and Tianjin in October

Strong demand anticipated

Singapore is still seeing a strong demand for inbound tourism. The number of flights going through Changi is expected to hit 80% of pre-COVID levels by end of the year; Changi's average weekly passenger traffic in early September at around 60% has exceeded earlier projections.

The impact on near-term profitability from high oil prices may be muted; 40% of projected fuel consumption has been hedged till 1QFY24. It is less susceptible to OPEC+ decision today as it mulls cutting production limits by as much as 2 million barrels per day.

Recovery in passenger volumes should outpace that of peers in the region. SIA's international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first Vaccinated Travel Lane (VTL) in Sep 2021. We expect this trend to persist and envisage the group's passenger traffic hitting 81% and 102% of 2019 levels by end-FY23/24F, respectively, supported by Singapore's new Vaccinated Travel Framework and the synchronised reopening of borders in the region and other key markets.

Favourable supply-demand dynamics underpin healthy passenger and cargo yields. Colossal pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields. Cargo yields should also meanwhile remain high due to prolonged widespread supply chain disruptions.

Current valuation does not adequately reflect its brighter earnings prospects. The airline is currently priced at 5.7x EV/EBITDA (FY23F), consistent with its 3-year average prior to the pandemic but at a discount to regional peers. We believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple above its peers.

Key risks

The 3 key risks on SIA are

1) countries in North Asia reopening slower than expected

2) persistent cost pressures stemming from inflation; and

3) passenger and cargo yields softening ahead of expectations

I am personally bullish on this stock for long term, as views on covid has now shifted from pandemic to endemic. Global air travel has already resumed for most countries and passenger loads are continually on the rise. I am quite vested in this stock and my views could be biased, DYODD before making any trading decisions.