To The Moon

$SIA(C6L.SI)$  Singapore Airlines' (SIA) 59% year-on-year decline in Q1 net income to S$186 million is a sharp deterioration, particularly when viewed against the backdrop of only a marginal 1.5% increase in revenue to S$4.79 billion. This suggests that the cost side of the equation – particularly non-operational pressures such as losses from Air India Ltd. and reduced interest income – is beginning to weigh more heavily on the bottom line.

Key observations:

1. Air India Drag:

The investment in Air India, while strategic in positioning SIA within a fast-growing aviation market, has evidently become a short-term liability. Losses here reduce consolidated profitability and cast doubt on the near-term returns from this partnership.

2. Falling Interest Income:

With the high-interest rate environment likely having peaked, a drop in interest income is not surprising. However, the size of its impact on profit implies SIA had benefited meaningfully from interest income in the prior period, and the erosion of this buffer now reveals weaker core earnings strength.

3. Revenue Resilience, But Margin Pressure:

Despite record travel volumes and strong cargo demand, the modest 1.5% revenue growth highlights yield compression, possible fare competition, and/or currency effects. It also suggests that cost growth, whether from fuel, staffing, or aircraft-related expenses, may be outpacing top-line expansion.

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On Whether to Bottom Fish Below SGD 7

SIA shares dropping below SGD 7 would bring the valuation into a more historically cautious range. Here’s how to think about it:

Technicals & Market Sentiment: If sentiment continues to turn negative, especially in the absence of positive forward guidance, testing below SGD 7 is plausible. At that level, long-term investors may begin to see value, especially if they believe in a recovery of Air India’s performance and stability in operating margins.

Valuation Support: At SGD 7, the market may start pricing in the bulk of the near-term headwinds. Given that SIA holds a strong balance sheet and enjoys brand premium in the Asia-Pacific aviation sector, a sub-SGD 7 valuation could provide a margin of safety for contrarian or yield-seeking investors, especially with dividend reinstatement policies in mind.

Risks to Watch: Persistent losses from Air India, geopolitical instability affecting travel routes, softening cargo yields, or macroeconomic slowdowns in key markets such as China could drive further downside.

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Summary View

The profit decline is serious but not necessarily structural. It reflects a combination of external drag (Air India) and cyclical factors (interest income decline). Should the market overreact and push SIA below SGD 7, the stock may become attractive for long-term investors with a tolerance for volatility and confidence in Asia-Pacific air travel's long-term trajectory. However, given the opaque turnaround timeline for Air India and margin compression, a cautious and staggered entry strategy may be prudent.