Singapore Airlines: Turbulence Ahead (OTCMKTS:SINGY)

In February, I downgraded Singapore Airlines stock to Hold on a challenging cost profile combined with unit revenue pressure. Additionally, the stock had underperformed against the broader market and while there was a double-digit return, it was not attractive compared to the market performance. Analyzing the stock in my stock screener also did not provide any compelling reason to mark the stock a buy. In this report, I will be discussing the most recent results and revisit my price target for Singapore Airlines stock.

Singapore Airlines Financial Results Do Show Challenging Revenue Environment

Looking at the results, things are not looking great. When looking at top line growth, I am looking at top line growth with capacity expansion for context. Total revenues increased 7% on passenger capacity expansion of 23%. That is not quite favorable. It gets a bit better when we consider that passenger revenues increased 9.7%. However, it still points at one of the risks I pointed out previously actually materializing and that risk is unit revenue erosion. Cargo revenues tumbled 22.4% as a function of continued weakening in yield.

When capacity is not translating favorably to the top line, I believe that in order for that capacity expansion to be worth it we should be seeing significant improvement in unit costs. Total costs increased 8% partially offset by a 2.5% reduction in net fuel cost. However, non-fuel costs increased by 13.5% driven by higher passenger costs which rose 43% while navigation fees, handling charges and staff costs all increased double digit but with lower-than-capacity cost growth. So, in absolute terms costs grew. Unit cost development, however, was favorable. Unit costs excluding fuel declined 3.3% at Singapore Airlines and 4.5% at the low-cost arm Scoot.

Overall, operating profit increased 1.3% with margins declining from 15% to 14.3%. I believe that in the current operational environment, margin pressure and erosion will continue to be present.

Is Singapore Airlines Stock A Buy?

I added the Singapore Airlines balance sheet to my model in combination with forward projections and although EBITDA estimates have gone up, the investment case is not a highly compelling one with nearly 50% upside against an industry standard valuation but 33% downside when basing the valuation on the median EV/EBITDA multiple for Singapore Airlines. The somewhat cumbersome investment case for Singapore Airlines is driven by expectations that free cash flow will be pressured as capital expenditures are set to rise to grow the fleet. Growing fleets are nice, but we also see that unit revenues are under pressure. So, the risk is that Singapore Airlines will spend billions of dollars on flight equipment while its ability to squeeze revenues out of the seats will remain under pressure.

Furthermore, the company has mandatory convertible bonds which do not rank as debt, but as equity. Singapore Airlines has been redeeming these MCBs and the last tranche will be redeemed by June 2024. Since this is not a debt instrument to Singapore Airlines, the cash and shareholder equity are reducing subsequent to the redemption but the debt will remain the same. While I do consider this to be part of the deleveraging process, it does nothing to the gross debt position while increasing the net debt.

Overall, I like how the company is managing its debt but I fail to see a compelling investment case for Singapore Airlines and reiterate my hold rating.

Conclusion: Singapore Airlines Is A Better Hold Than Buy

While I do like how Singapore Airlines, just like many airlines, is cleaning up its balance sheet, I believe the FY2024 results did show the realities rather well. Unit revenues and cargo revenues remain under pressure, fuel costs are the uncontrollable swinging cost elements for airlines and overall the industry remains to suffer from some cost inflation making cost absorption a challenge. Singapore Airlines has made progress on that end in FY2024, but I believe that investment in the airline is uncompelling.

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