Singapore Airlines - CIMB Research 2015-11-06: Mainline carrier disappoints

SIA SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Mainline carrier disappoints

SIA’s earnings underperformed our expectations as its 1HFY16 core net profit made up just 32% of our previous full-year forecast, vs. over 40% in the past three years.
The mainline SIA suffered a bigger-than-expected fall in passenger yields due to aggressive competition, while unit costs did not decline as much as anticipated.
On the bright side, SilkAir, Scoot and SIA Cargo delivered substantial improvement.
We maintain our Add call, and leave our earnings forecasts and target price unchanged (at average P/BV since 2001 of 1.1x) pending today’s briefing.

The SIA group delivered core net profit of S$198m in 2Q16, but this included unusually high dividends from “long-term investments”. Without this, core earnings would only have been S$107m, down 13% yoy on a like-for-like basis, despite low oil prices.
For 1H16, core net profit without the dividend and without the compensation from Airbus and Boeing for delivery delays, would have been 47% lower yoy.
SIA declared an interim 10 Scts DPS, up from 5 Scts last year.

Mainline SIA saw its core EBIT fall 28% yoy in 2Q16, and fall 43% for 1H16, excluding compensation for delivery delays. Its unit cost reduction was minimal despite jet fuel prices (inclusive of hedging losses) falling 27% yoy to US$90/bbl in 2Q16, as it saw higher maintenance and leasing costs, while the US$ appreciated 11% against the S$.
Mainline SIA also lowered its yields 4.6% to compete for passengers.
Finally, there was also a large, unexplained fall in ‘ancillary income’ .

In contrast, SilkAir and Scoot both delivered load factor increases, stable/higher yields, and sharply lower unit costs as a result of their fleet modernisation programmes. Hence, SilkAir saw significantly higher profits, while Scoot neared breakeven.
SIA’s investment in, and expansion of, these two carriers is yielding fruit as they have a bright future.

Surprisingly, SIA Cargo managed to narrow its losses yoy despite poor operating conditions. Cargo yields dropped almost double-digit, as lower fuel costs were entirely passed through. Poor air freight demand also caused SIA Cargo to suffer a fall in loads.

Tigerair Singapore contributed S$10m in operating losses in 2Q16. It was only consolidated from Oct 2014 (3Q15).
SIA Engineering saw its profit contribution rise as it reduced expenses more quickly than the reduction in its revenue.

Mainline SIA’s monthly passenger yields continued to decline at its fastest pace this year, in the data released up to Sep. At the same time, SIA’s all-in fuel cost may decline 13% from US$94/bbl in 1H16, to as low as US$82/bbl in 2H16.
SIA guided that advance passenger bookings for Oct-Dec are positive, but mainly boosted by promotional activities, suggesting a mixed outlook in the near future.
Separately, SilkAir and Scoot will likely continue to deliver strong improvements on a yoy basis.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-06

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