Is It Time to Sell? 3 Indicators SIA Share Price is Too High
Joe Wong, Dealer | Contract for Differences
Joe Wong is a seasoned investor with over 15 years of experience in both the financial markets and entrepreneurial ventures. A Macquarie University alumnus with a Bachelor’s degree in Applied Finance from Australia, Joe is a staunch advocate in the Value Investing approach.
His portfolio management strategy focuses on identifying undervalued companies with strong fundamentals. This disciplined approach has consistently yielded double-digit returns on his own portfolio. Despite his investment track record, Joe maintains a strong appetite for knowledge and remains an avid reader.
Singapore Airlines (SIA) has long been a cornerstone of our nation’s aviation industry, with its share price often reflecting the company’s financial health and market sentiment. The share price has since increased from its low of S$3.50 in 2020 during the pandemic and hit a 52 week high of S$7.38 before correcting to the current price of S$6.21. This article offers insight into SIA’s current market valuation and its potential implications for shareholders.
We’ll examine three key indicators that suggest SIA share price might be overvalued, the impact of rising operating expenses on the company’s bottom line, the challenges posed by increased competition and pressure on passenger yields, and the influence of geopolitical and economic uncertainties on the airline’s future outlook. By exploring these factors, investors can make informed decisions about their SIA holdings and better assess risks and opportunities in the current market environment.
Recent Share Price Stagnancy
SIA’s share price has shown significant fluctuations recently, which reflects the dynamic nature of the aviation industry and investor sentiment.
On 30 Oct 2024, SIA shares closed at S$6.46, down S$0.03 cents with 8.8 million shares traded.
Although the share price has since strengthened since the COVID pandemic, it has yet to consistently break through above its 52 week high of S$7.38.
Factors behind the Price Stagnation
The market reacted negatively to SIA’s higher-than-expected operating expenses in Q1 2024 and caused a S$0.57 drop in share price on 1 Aug.
The cargo business remained a drag, and added to concerns about a slower-than-expected return to pre-pandemic operations due to increased competition and supply chain disruptions linked to the conflict in the Red Sea 1.
Additionally, heightened geopolitical tensions and global economic uncertainty could weigh on business sentiment and the demand for air travel.
Market reaction to Q1 2024 results
Source: SIA Website
Source: SIA Website
Source: SIA Website
SIA’s 1Q2024 results, released on 31 Jul 2024, indicated a continued healthy demand for air travel, despite a slight quarter-over-quarter revenue decrease. Year-over-year, its revenue grew. However, its net profits experienced a sharp decline of 38%, from S$734 million to S$452 million. Increased competition pressured passenger load factors (a key metric used in the airline industry to measure how effectively an airline fills its available seats with passengers), while net fuel costs after hedging rose only 1.4% compared to the fourth quarter of 2023. While passenger load factor remained robust at 86.4%, Scoot, SIA’s low-cost carrier, saw load factors decline from 91.7% to 89% in the 1Q2024 compared to the 4Q2023.
Source: SIA Website
SIA Cargo’s load factor (a key metric used in the airline industry to measure how effectively an airline fills its available cargo space with cargo load) remained low but stable at 57.7% in 1Q24. However, when compared to its load factor in 1Q23, the numbers indicate a significant improvement which could have stemmed from the heightened demand tied to the Red Sea conflict.
Source: SIA Website
Upon examination of the group’s primary business segments in terms of operating profit, year-over-year comparisons reveal a significant decline. The full-service carrier business experienced a 36.5% decrease in operating profits, while the low-cost carrier business suffered a substantial 89% drop. Only the engineering arm demonstrated a notable improvement in operating profit. However, the engineering business’s revenue contribution to the group remains relatively minor.
Analyst perspectives on the drop
Analysts have offered mixed views on SIA’s stock performance. Both Phillip Securities Research and DBS Group Research described the results as disappointing, noting the sequential decline in earnings and operating margins 1. However, analysts from Nomura maintained a buy recommendation, with a target price of SGD 12.26 per share, citing potential earnings per share growth and an attractive dividend yield 1.
Indicator 1: Rising Operating Costs
Source: SIA Website
Fuel, a major component of airline operating expenses, increased to S$1.370 Billion in 1Q24, mainly due to higher fuel prices and volumes uplifted 2. Despite some moderation in fuel prices recently , they remain elevated, posing a considerable challenge for SIA to maintain its profit margin 2.
Inflationary pressures
Source: SIA Website
Inflation has a widespread effect on various aspects of SIA’s operations. Labour costs, another significant expense for airlines, are subject to upward pressure as employees seek compensation that keeps pace with the rising cost of living. Additionally, supply chain disruptions have led to increased prices for aircraft parts, further straining the airline’s finances 3. These inflationary pressures compound the impact of the pandemic across the aviation industry 4.
The rise in costs is indeed reflected in the last Q1 earnings report for 2024. Operating costs rose slightly by 1% QoQ and 7.7% YoY in 1Q2024, leading to a 38.4% drop in operating profit to S$452 million.5. This significant drop in profits, despite increased revenue, highlights the challenges SIA faces in maintaining its financial performance. 6.
Indicator 2: Increased Competition and Yield Pressure
Passenger yield trends
SIA has experienced a decline in passenger yields due to intensifying competition. In the June quarter, the passenger yield, which measures flight profitability, fell by 4.6% to S$0.103 per kilometer from S$0.108 a year earlier 7. This decrease in yield has had a significant impact on SIA share price, as it directly affects the airline’s profitability and revenue growth.
Competitive landscape in air travel
The air travel industry has become increasingly competitive as airlines worldwide expand their routes and flight frequencies to meet the robust demand for travel. Together with the introduction of the low cost carrier industry in the aviation business, this surge in capacity has led to heightened competition, putting pressure on ticket prices and squeezing airlines’ margins 7. For SIA, this competitive landscape has resulted in a moderation of passenger yields, particularly as other carriers progressively restore their capacity 8.
Potential long-term effects on revenue
The intensifying competition and yield pressure could have long-term effects on SIA’s revenue. While passenger demand remains healthy, supported by strong forward bookings to North and Southeast Asia, SIA anticipates continued yield pressure due to increased market capacity9.
To address these challenges, SIA will need to monitor market trends closely and adjust its capacity and network accordingly 10.
Indicator 3: Geopolitical and Economic Uncertainties
Geopolitical tensions and economic uncertainties have a substantial impact on SIA’s share price and outlook.
Red Sea conflict impact on cargo
The ongoing Red Sea conflict has caused major disruptions to global shipping routes, with a ripple effect on air cargo demand. The crisis has led to a 67% decrease in container ship transits through the Suez Canal, a crucial waterway for global trade 11. As a result, airfreight demand has risen, putting pressure on capacity and potentially leading to increased competition and significant price hikes on major trade routes 12.
This increased competition may drive competitors to expand capacity, which could potentially diminish the positive effect SIA initially experienced from increased airfreight demand.
Global economic outlook
The global economic landscape presents a mixed picture for airlines like SIA. While there are signs of recovery in some regions, others face challenges. The Middle East is forecasted to have a more favorable economic environment in 2024, despite geopolitical tensions but slower realised and potential GDP growth in major economies could dampen air travel demand and contribute to share price volatility 13.
Potential risks to air travel demand
Ongoing conflicts in Ukraine and the Middle East have the potential to restrict airspace and impact international operations 14. Additionally, new climate policies could dampen the growth in demand for air travel over the coming decades 13. These risks, combined with potential economic slowdowns, may create volatility as the market reacts to changing travel patterns and regulatory environments.
Conclusion & Valuation
SIA’s current share price appears to reflect the pressures of rising costs, competitive challenges, and geopolitical uncertainties. These indicators suggest that SIA’s shares might be overvalued, prompting investors to review their positions carefully.
As the aviation industry continues to face challenges, SIA’s ability to navigate these hurdles will be crucial to its future performance. Despite strong air travel demand, the company must adapt to changing market conditions to maintain its competitive edge.
Based on a discounted valuation model analysis with a risk adjusted expected return of 12%, and a terminal growth rate of 2% for SIA, estimates SIA’s intrinsic value is S$6.73 today.
With 2Q2024 earnings set to be announced on 8 Nov, it remains to be seen whether SIA’s share price can surpass the S$7 mark amid its challenging outlook.
How to get started with POEMS
POEMS’ award-winning suite of trading platforms offers investors and traders more than 40,000 financial products across global exchanges.
Trade Smarter and Faster
With our newly launched POEMS Mobile 3 Trading App
Explore a myriad of useful features including TradingView chartings to conduct technical analysis with over 100 technical indicators available!
Take this opportunity to expand your trading portfolio with our wide range of products including Stocks, CFDs, ETFs, Unit Trusts and more across 15 global exchanges available for you anytime and anywhere to elevate you as a better trader using our POEMS Mobile 3 App!
For enquiries, please email us at cfd@phillip.com.sg.
References
[1] https://www.straitstimes.com/business/sia-share-price-hits-turbulence-tumbling-nearly-10-on-cost-concerns
[2] https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/News-Release/nr-q4fy2223.pdf
[3] https://www.linkedin.com/pulse/inflation-aviation-look-out-below-orlando-o-spencer-i–retvf
[4] https://www.oliverwyman.com/our-expertise/insights/2022/jul/the-impact-of-the-pandemic-across-the-aviation-industry.html
[5] http://www.100knots.com/can-sia-maintain-its-stellar-performance-amid-rising-fuel-costs/
[6] https://www.straitstimes.com/business/sia-posts-lower-quarterly-profit-as-yields-fall-and-fuel-costs-rise
[7] https://www.scmp.com/news/asia/southeast-asia/article/3272682/singapore-airlines-warns-competition-fuel-costs-affect-revenues-profitability
[8] https://www.singaporeair.com/saar5/pdf/Investor-Relations/Financial-Results/News-Release/nr-q4fy2324.pdf
[9] https://worldofaviation.com/2024/05/singapore-airlines-group-reports-record-full-year-profit-as-demand-for-air-travel-soars/
[10] https://www.reuters.com/business/aerospace-defense/singapore-airlines-first-quarter-profit-nearly-doubles-2023-07-27/
[11] https://www.marsh.com/sg/risks/global-risk/insights/red-sea-crisis-impact-manage-cargo-risk-international-trade.html
[12] https://www.aircargonews.net/business/supply-chains/red-sea-conflict-sees-air-cargo-demand-rise/
[13] https://www.iata.org/en/iata-repository/publications/economic-reports/global-outlook-for-air-transport-june-2024-report/
[14] https://www.iata.org/en/iata-repository/publications/economic-reports/global-outlook-for-air-transport—december-2023—report/
[15] https://www.stocksbnb.com/reports/singapore-airlines-lower-yields-and-rising-fuel-costs/
More Articles
Playing Defence: Diversification in Forex Trading
Learn how strategic planning and risk management can help you navigate the highs and lows of the forex market. Don’t miss out on unlocking the secrets to long-term profitability!
From Boom to Bust: Lessons from the Barings Bank Collapse
Did you know that the collapse of Barings Bank in 1995 was from massive losses incurred by a rogue trader? Delve into the tale of how Nick Leeson’s fraudulent investments sent shockwaves through the financial world.
Japan's Economic Resurgence – Unveiling the Tailwinds Behind Nikkei 225’s Record Leap
Discover the driving forces behind Japan’s market surge, delve into its economic performance and learn how CFD products can help you navigate the Japanese market’s volatility via our article!
Disclaimer
These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products.
Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance.
Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries.
The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries.
Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
CFD Promotion Disclaimer
This promotion is provided to you for general information only and does not constitute a recommendation, an offer or solicitation to buy or sell the investment product mentioned. It does not have any regard to your specific investment objectives, financial situation or any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of your acting based on this information.
Investments are subject to investment risks. The risk of loss in leveraged trading can be substantial. You may sustain losses in excess of your initial funds and may be called upon to deposit additional margin funds at short notice. If the required funds are not provided within the prescribed time, your positions may be liquidated. The resulting deficits in your account are subject to penalty charges. The value of investments denominated in foreign currencies may diminish or increase due to changes in the rates of exchange. You should also be aware of the commissions and finance costs involved in trading leveraged products. This product may not be suitable for clients whose investment objective is preservation of capital and/or whose risk tolerance is low. Clients are advised to understand the nature and risks involved in margin trading.
You may wish to obtain advice from a qualified financial adviser, pursuant to a separate engagement, before making a commitment to purchase any of the investment products mentioned herein. In the event that you choose not to obtain advice from a qualified financial adviser, you should assess and consider whether the investment product is suitable for you before proceeding to invest and we do not offer any advice in this regard unless mandated to do so by way of a separate engagement. You are advised to read the trading account Terms & Conditions and Risk Disclosure Statement (available online at https://www.poems.com.sg/) before trading in this product.
