1QFY16: Disappointing Earnings As Yields Fall To Multi-year Lows
- Were it not for a S$110m gain from slot compensation, SIA would have been in the red.
- The disappointing earnings came as yields fell to a 7-year low.
- SIA’s continued guidance of weak yields and further fuel hedging losses lead us to slash our full year net profit estimate by 61%.
- Downgrade to SELL and lower our target price by 8%.
RESULTS
• Headline numbers in line with consensus and above our estimate of S$48m but….
- Included in 1QFY16 results was a S$110m compensation for aircraft delivery slots.
- SIA had not guided for this and excluding this, earnings would have been way below estimates and in the red.
• …pax yields fall to the lowest level in seven years; warns of further weakness.
- Parent airline’s yield fell 1.8% yoy to 10.70 cents.
- Singapore Airlines (SIA) noted the erosion in yields was due to “significant capacity injection and aggressive fares from competitors, particularly on Americas and Europe routes “.
- We also believe that a weak A$ and rupiah could also have contributed to the weakness.
- SIA warned that the decline in yields is likely to persist.
• Into-plane fuel costs fell 33% yoy but fuel hedging losses of S$263m offset most of the gains.
- The fuel hedging loss was due to SIA hedging jet fuel at US$110/bbl during the quarter.
- As a result, net fuel cost declined 13.3% yoy. Ex-fuel cost was mostly flat.
- For 2QFY16, SIA had hedged 55% of its fuel requirements at US$104/bbl.
- Given that jet fuel is trading at US$62-70/bbl since the start of July, we believe SIA will recognise at least S$200m in hedging loss in 2QFY16.
STOCK IMPACT
• Guidance for weak demand for the Americas and Europe routes.
- While not totally surprised, SIA’s specific guidance does not add to confidence and suggests weak demand for all classes.
- This will impact yields going forward. SIA also warned that yields are likely to remain weak.
• Not optimistic of a cargo upturn.
- SIA warned that air cargo yields are “unlikely to see an upturn as industry overcapacity persists.”
• Premium economy class to be launched in August.
- We do not expect this to alter the tide of lower yields as premium economy cabins amount to only about 4% of total fleet when fully launched.
EARNINGS REVISION/RISK
• We slash our FY16 and FY17 net profit forecasts by 61% and 56% respectively as we lower our pax yield assumptions from -0.9% for FY16 to -3.5%.
- We also cut our FY16 dividend forecast from 50 cents/share to 22 cents/share.
VALUATION/RECOMMENDATION
• Downgrade to SELL.
- In our recent note titled Qatar Trouble, we highlighted the risk to yields as load factors continued to decline across Europe.
- SIA has now not only guided for weak demand out of Europe but also yields.
- The trend towards lower yields led us to lower our fair value P/B multiple for SIA’s core operations from 0.85x to 0.80x.
- Our new target price is thus reduced by 8% to S$10.70.
SHARE PRICE CATALYST
• None.
(K Ajith)
Source: http://research.uobkayhian.com/
