Idea of the Week: Three issuers to travel from runway to resort

• The Asian travel recovery has helped to drive a rebound in the revenues and profits of Singapore Airlines, Shangri-La Hotels, and CapitaLand Ascott Trust.
• Looking ahead, we think the travel recovery continues to have legs to run, especially on the back of a China reopening which began in late-2022.
• These three issuers listed above have relatively stable and robust liquidity and credit profiles.
• For SIA, we like its shorter-end 2024 (retail) and 2025 bonds which offer a relatively attractive yield of around 4%.
• Investors looking for some yield pick-up over SIA can consider ART’s 2024 (retail) bonds or SLH’s 2025 bonds.

Asian travel rebound continues to pick up steam

The Asian travel rebound continues to pick up steam, with China only reopening its borders late last year, helping to drive a fresh wave of tourism across the continent. We look at three potential beneficiaries of this travel rebound: Singapore Airlines Limited (“SIA”), Shangri-La Hotels (“SLH”), and CapitaLand Ascott Trust (“ART”). These issuers appear poised to continue benefiting from a recovery in travel prospects, and we think they provide many options for bond investors to choose from depending on their investment profiles.

Performance highlights of three travel names: SIASP, SLHSP, ARTSP

All three issuers continued to see a sharp rebound in revenues in their most recent financial filing (FY23 ended Mar 2023 for SIA, FY22 ended Dec 2022 for SLH, and 1H23 ended Jun 2023 for ART). On a year-on-year (“YoY”) basis, SIA recorded triple-digit percentage growth in gross revenues, while SLH and ART each recorded double-digit revenue growth, suggesting strong recoveries over the past year. In addition, looking at revenues starting from the pre-COVID era, we see signs of a fairly sustained rebound over the past three years (following the dip from COVID), with SIA’s and ART’s revenues in particular already surpassing pre-COVID levels (Table 1).

A breakdown of revenues also reveals fairly broad-based recoveries for all three issuers. SIA saw a large increase in revenue per available seat mile (“RASM”) on the back of significantly higher passenger load factors (“PLF”) (explanation of terms below). SLH and ART also saw increases in their respective occupancy rates and daily rates, helping them achieve double-digit growth in revenue per available room (“RevPAR”) and revenue per available unit (“RevPAU”) respectively. As a whole, we can see that both companies have benefited from significantly higher travel demand, reflected in the overall RASM / RevPAR / RevPAU figures (Table 2).

• PLF: This metric essentially calculates the percentage of seats occupied (similar to a hotel’s occupancy rate).
• Yield per passenger mile: This metric calculates the revenue of an airline per mile flown by each customer (similar to a hotel’s daily room rate).
• RASM: This metric is an indicator of revenue per unit of capacity, calculated by multiplying PLF with yield per passenger mile (similar to a hotel’s RevPAR).

This sharp rebound in revenues also helped to drive an improvement in net incomes across these three issuers. SIA’s net income turned positive for the first FY in 4 years and recorded its highest FY net income ever in its history. SLH’s net losses also narrowed significantly (-45.5%), and we expect them to turn profitable soon on the back of an ongoing travel rebound, especially from Mainland China. ART also saw a strong rebound in net income, both on a 1-year and 3-year basis (Table 3).

Table 1: Gross revenues recovered strongly across all three issuers

Table 2: Breakdown of revenues also showed a fairly strong recovery

Table 3: All three issuers saw a solid improvement in net income

Management guidance indicates a positive outlook ahead

As a whole, we find that management guidance across these three issuers remains cautiously optimistic. We summarise some key takeaways from the guidance they have provided in the table below, covering (i) their views on the travel rebound; (ii) key challenges ahead; and (iii) long-term initiatives undertaken by them (Table 4).

We broadly agree with the cautiously optimistic sentiment expressed by these three issuers. We think the travel recovery continues to have legs to run especially on the back of a loosening of restrictions in China, and this could help to mitigate some of the nearer-term headwinds like a weakening macro environment as well as inflationary pressures.

Table 4: Summary of management guidance in recent financial reports

Credit and liquidity profiles remain robust

In terms of liquidity, all three companies generally saw their cash positions improve YoY in their most recent filing, while they also maintained relatively stable operating cash flow ratios as well. For ART specifically, its gearing ratio of 38.6% remains well below current regulatory limits. As a whole, we think these three issuers continue to maintain relatively robust credit and liquidity profiles, with SIA having the strongest profile amongst the three, and SLH having the weakest (Table 5).

These issuers also have relatively manageable debt maturity schedules (Chart 1). SLH and ART have weighted average debt maturities of 3.53 years and 3.6 years, with about 34% and 23% of their debt maturing by end-2024 respectively. In addition, a majority of these two issuers’ debt is on fixed rates (60.6% and 80% respectively), helping them to mitigate interest costs in a higher-for-longer rates environment. As for SIA, while it does have a significant 45% of the debt due within the next two years, we think there is little cause for concern given its strong cash position.

Table 5: Credit ratios of SIA, SLH, ART

Chart 1: Debt maturity schedules of SIA, SLH, ART

Recommendations

We think the three issuers highlighted above – Singapore Airlines, Shangri-La Hotels, and CapitaLand Ascott Trust – remain relatively solid based on their recent top-line and bottom-line performances, as well as their respective credit metrics. These three issuers have issued a wide array of bonds for investors to select from – our recommendations are in blue (Table 6).

In our view, SIA has the least risky credit profile among these three issuers, as we have highlighted above. SIA also benefits from its link to its substantial shareholder Temasek, which previously showed a commitment to support the company during previous crises (e.g. its SGD 19b rescue package during COVID-19). For SIA, we especially like its shorter-end bonds, which give a relatively attractive yield of between 3.9% and 4.1%: SIASP 3.030% 28Mar2024 Corp (SGD) – Retail and SIASP 3.035% 11Apr2025 Corp (SGD).

For ART, while SIA edges it out in our view in terms of credit quality, we think it continues to have a solid credit profile, and its bond remains relatively stable. Investors looking for a slight yield pick-up with a slightly higher credit risk (57.4 basis points) over the aforementioned SIASP 3.030% 28Mar2024 Corp (SGD) – Retail can consider the ARTSP 4.000% 22Mar2024 Corp (SGD).

Finally, for SLH, we think this issuer could be of interest also looking for some yield pick-up over “safer” bonds from SIA. Another interesting thing to note for SLH is its large exposure to the China reopening with the company estimating about 69% of (effective share of) EBITDA poised to benefit greatly from this. Investors looking for a yield pick-up at a slightly higher credit risk over ART, with a potential play on the China reopening, can consider the SLHSP 4.500% 12Nov2025 Corp (SGD).

Table 6: List of bonds from SIA, SLH, and ART (recommendations in blue)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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