Broker's take: OCBC turns positive on aviation, maintains 'sell' on SIA

OCBC Investment Research has turned more positive on the aviation sector given recent progress on Covid-19 vaccines and easing travel restrictions. The research house now expects the sector to recover gradually in 2021.

In a Thursday report, analyst Chu Peng said she believes the recovery, which is expected to be particularly strong in the second half of the year, will be led by leisure travel due to strong pent-up demand. This is assuming a successful vaccination rollout as well as a loosening of travel restrictions by mid-2021.

Domestic travel is likely to lead the recovery while international travel will take a longer time to recover due to headwinds from border controls, said the analyst.

OCBC's more positive outlook for the aviation sector comes despite the International Air Transport Association's (IATA) projected industry net loss of US$38.7 billion in 2021, up from its initial forecast of US$15.8 billion. Passenger numbers are expected to grow 56 per cent year on year to 2.8 billion passengers, although Ms Chu noted this would still represent a 62 per cent decrease compared to the 2019 levels.

IATA estimates the global airline industry to have lost US$118.5 billion in 2020, more than its initial projected net loss of US$84.3 billion.

In her report, Ms Chu noted that global passenger traffic, measured by revenue passenger kilometres, is not expected to return to pre-Covid-19 levels until 2024 at the earliest. Weak consumer sentiment amid economic weakness and rising unemployment will also limit people's ability to travel, she added.

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Ms Chu maintained her "sell" call on Singapore Airlines (SIA) with a fair value estimate of S$3.70.

She said that while the flagship carrier's December 2020 operating statistics showed improvements from trough levels, they remained sluggish due to weak international travel demand.

SIA is nonetheless expecting passenger capacity to reach 25 per cent of pre-Covid 19 levels and for traffic to resume on 45 per cent of its network by March 2021. This is given recent positive developments on Covid-19 vaccines, which Ms Chu expects the airline to benefit from in tandem with Singapore's progressive re-opening.

"SIA's share price rallied over 24 per cent over the past three months and is currently trading at 1.7 times standard deviation above its historical 5 years mean of 0.88 times price-to-book," said Ms Chu.

"While we believe SIA could benefit from Singapore's progressive re-opening and the roll-out of vaccines in 2021, there could be risk of potential share dilution. The company will be issuing an earnings update in February," she added.

SIA last month disclosed it had used S$7.1 billion of the S$8.8 billion it raised from a rights issue in June 2020. The airline has an option to raise another S$6.2 billion in additional mandatory converted bonds.

It recently raised US$500 million via its first US dollar-denominated bond issue, which was oversubscribed with final demand tallying at more than US$2.85 billion.

SIA shares were trading at S$4.39 as of 4.59pm.