UOBKH downgrades SIA after Q1 earnings a ‘major miss’ against guided range; lowers TP to S$6.03 

[SINGAPORE] UOB Kay Hian (UOBKH) equity analyst Roy Chen downgraded his rating on national carrier Singapore Airlines (SIA) to “sell”, with a reduced target price of S$6.03 from S$6.63, on the back of weaker earnings for the first quarter of FY2026.

On Wednesday (Jul 30), the analyst said that the net profit SIA reported a net profit of S$186 million for the period, down 58.8 per cent year on year from S$452 million, was a “major miss” against their guided range of S$400 million to S$500 million. Its earnings only made up 13 per cent of UOBKH’s full-year estimate, he noted.

His FY2026 forward earnings forecasts for the airline company have been adjusted to 30 per cent, and 18 per cent for FY2027.

Other analysts from Maybank have similarly downgraded their rating on SIA to “sell” from “hold” on the back of weaker-than-expected Q1 earnings, while CGS International lowered their call on the stock to “reduce”, cutting its price target to S$6.80 from S$6.88.

Chen cited three factors which caused such performance by SIA, which included non-fuel operating expenses per unit of capacity being higher than expected, rising 4.7 per cent year on year.

While management cited reasons such as inflationary pressures on key cost elements, a miss in operating profit was clear to the analyst, as it had resulted in a 14 per cent year on year decline, as compared to his expectations of a growth rate between 15 to 17 per cent.

In addition, there was a larger-than-projected drop in interest income due to lower cash balances, as well as a sharp decline in deposit interest rates.

The final factor, notably, concerns the heavier-than-projected drag from Air India, which SIA has a 25.1 per cent stake in since December 2024. This has resulted in a S$122 million shortfall compared with the overall positive contribution by joint venture entities in Q1 FY2025 without Air India.

Despite transformation efforts, Air India remained in a loss-making position, recording a widened year on year net loss of 10,859 crore Indian rupees (S$1.6 billion) in FY2025.

The Air India Flight 171 accident which occurred on Jun 12 this year also signalled how FY2026 has not been an easier year for the airline, too. The flight from Ahmedabad Airport in India, to London Gatwick Airport in the United Kingdom, crashed 32 seconds after takeoff. Of about 240 crew members and passengers, only one survived the crash.

The analyst said management noted that there was little provision recognised in Air India’s Q1 FY2026 financial performance and it is unclear if any provision is required for the upcoming quarter.

Chen said: “Given the lack of transparency for Air India’s financial outlook, we have pencilled in a S$400 million loss contribution by Air India to SIA in FY2026, assuming no loss pare-down by Air India in the financial year.”

Certain strengths in the airline’s balance sheet were noted by the UOBKH analyst, such as its net cash position of around S$2.2 billion as of end-Q1 FY2026, equivalent to around 10 per cent of SIA’s current market capitalisation by his estimates. The net cash balance, however, has yet to take out SIA’s pending FY 2025 final dividend payment – S$0.30 per share, with its ex-dividend date: Aug 8, 2025.

“Group revenue was also in line with our projection, rising 1.5 per cent year on year, driven by increased pax flown revenue, and engineering and other service revenue which was up 13.7 per cent year on year, though it was partly offset by lower cargo flown revenue down 1.9 per cent year on year,” the analyst said.

As for passenger yields and cargo yields, they were moderated to 3.1 per cent and 4.5 per cent year on year in Q1 FY2026.

Management has maintained its guidance of a continued moderation in pax yields for the rest of year, though the pace of moderation is expected to slow down, amid a volatile operating environment.

“The pace of pax yield moderation was in line with our expectations, but cargo yield underperformed expectations, as we were projecting a largely stable cargo yield level year on year, supported by frontloading activities in Asia,” Chen noted.

He expects all three foremost factors mentioned earlier to largely persist for the rest of FY2026.

He also noted that SIA’s FY2026 dividend yield would decline to 3.3 per cent, based on his updated earnings forecasts, even if a 70 per cent payout ratio is assumed, pegging to the upper end of SIA’s historical payout range.

“We think the overall year on year declining earnings in the rest of the year may result in a continued de-rating of SIA,” said the analyst.