Profit boost from unexpected source
- 1Q16 net profit improved 162% y-o-y to S$91m, but with significant contribution from one-off income from equipment transactions.
- Yields were weaker y-o-y and could continue to be under pressure; hedging losses still substantial.
- Earnings over the next few quarters to improve from lower fuel costs and lower hedging losses.
- Maintain BUY, TP S$12.80.
Highlights
Headline profit impressive, core performance less so
- Excluding Tigerair’s results, which was consolidated from Oct- 14 onwards, SIA’s revenue fell by S$117m or 3.2% y-o-y to S$3,565m on 4.2% decline in passenger carriage and 1.8% decline in yield.
- Net fuel cost decreased S$182m y-o-y, which was after hedging losses of S$263m.
- During 1Q16, SIA benefitted from income earned from the release of seven aircraft (A350-900) delivery slots originally slated for delivery over the next few financial years.
- We estimate the increase from this source was c. S$93m.
Small improvements in other segments.
- Including the above mentioned income from the release of aircraft delivery slots, SIA’s passenger segment’s EBIT improved to S$108m from S$45m a year ago.
- SIA Engineering’s contribution remained flat at S$21m, Silkair’s EBIT improved to S$5m from S$2m, while both SIA Cargo (S$9m vs S$18m) and Scoot (S$20m vs S$25m) recorded narrower losses.
Outlook
- Fuel cost savings to be more substantial from 2H FY16 onwards, which should earnings recovery.
- SIA hedged 55.4% of its fuel requirements for 2Q16 at US$104/bbl, and c. 45% of its fuel requirements for the full year at less than US$106/bbl, implying that fuel cost savings will be more substantial for SIA from 3Q onwards.
- We project SIA’s earnings to more than double to S$763m in FY16F and grow further to S$1,105m in FY17F.
- Earnings risk is on the upside if jet fuel stays below US$90/bbl for a sustained period.
- We have assumed an average jet fuel price of US$90/bbl for SIA in FY16 and FY17, compared to the current price of c.US$75/bbl.
- If fuel prices do not move up further, there should be further upside to our earnings estimates.
- Each US$1 saving on average jet fuel price boosts SIA’s earnings, ceteris paribus, by S$50m per annum.
Valuation:
- Our S$12.80 target price is based on 1.1x FY16 P/BV, pegged to its historical mean and reflects SIA’s improved earnings outlook.
- With net cash of c. S$3.40 per share, we see current valuation of 0.9x FY16 P/BV as an attractive entry level for investors.
Key Risks:
- Vulnerable to demand shocks and price competition SIA is susceptible to demand shocks such as economic outlook or pandemics e.g. if the MERS situation hits Singapore like SARS did back in 2003.
- However, share price rebounded quickly even during SARS once the situation was under control. Intense competition could put pressure on yields, which would impact the carrier’s profitability.
(Paul YONG CFA)
Source: http://www.dbsvickers.com/
