UOBKH calls a ‘sell’ on SIA, lowers target price after significantly weaker Q1 earnings

[SINGAPORE] UOB Kay Hian (UOBKH) equity analyst Roy Chen downgraded his rating on 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 described the national carrier’s net profit of S$186 million for the period – down 58.8 per cent year on year from S$452 million – as a “major miss” against the guided range of S$400 million to S$500 million; its earnings made up only 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 also downgraded their rating on SIA to “sell” from “hold” on the back of weaker-than-expected Q1 earnings. CGS International lowered its call on the stock to “reduce”, cutting its price target to S$6.80 from S$6.88.

UOBKH’s Chen cited three factors which dampened SIA’s performance, including non-fuel operating expenses per unit of capacity rising 4.7 per cent year on year – higher than expected.

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, against his expectations of a growth rate between 15 to 17 per cent.

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

The third and final factor, notably, concerns the heavier-than-projected drag from Air India, in which SIA has had a 25.1 per cent stake since December 2024. This 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 disaster on Jun 12 this year added to the airline’s troubles. The flight from Ahmedabad in the Indian state of Gujarat to London’s Gatwick Airport crashed 32 seconds after takeoff, killing about 240 passengers and crew; only one passenger survived.

The analyst said management noted that there was little provision recognised in Air India’s Q1 FY2026 financial performance, and it is unclear whether a 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.”

But the analyst also noted certain strengths in the airline’s balance sheet. One was 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.

However, the net cash balance has yet to factor in SIA’s pending FY 2025 final dividend payment – at S$0.30 a share. The ex-dividend date is Aug 8.

Chen said: “Group revenue was 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 were 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.”

Passenger yields and cargo yields 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 front-loading activities in Asia,” Chen noted.

He expects the three factors to largely stay in play for the rest of FY2026.

He forecast 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, pegged 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.