Singapore Airlines SIA - UOB Kay Hian 2016-01-18: Improved Pax Loads Across Parent SIA And All Subsidiaries

SIA SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Improved Pax Loads Across Parent SIA And All Subsidiaries

Pax load factors improved across parent SIA and all subsidiaries in December, which is positive.
We are encouraged by SIA’s and Scoot’s sustained high loads which, along with lower fuel costs, should lead to higher profitability for 3QFY16.
Going forward, we believe that the sharp decline in fuel costs, combined with Scoot’s improved operational performance, should drive FY17’s earnings growth.

In December, SIA recorded pax load factor improvement of 0.3ppt. The strongest load factor improvement was in the West Asia and Africa regions. This was partially offset by a decline in loads to Europe, which SIA attributed to softer passenger demand, particularly France.
We reckon this is likely due to the terrorist attacks in France. SIA also indicated that this is a “short-term dip”, suggesting signs of recovery in demand to Europe.
Overall, 3Q’s strong loads are encouraging and suggest that SIA’s efforts to improve operations to boost utilisation are bearing fruit.

The improvement was mainly due to strong demand during the quarter. Also, Scoot’s traffic grew by 22% ytd, resulting in a 2.6ppt load factor improvement even with rapid capacity expansion.
Meanwhile, SilkAir’s pax loads rose 0.1ppt in December, but registered a 0.6ppt decline in 3QFY16 loads due to weaker loads in October.

This comes despite SIA’s “cautious” cargo traffic outlook. SIA indicated this was due to additional ad-hoc charters and cargo loads were generally weak except in the Southwest Pacific region.
We note that SIA’s 3QFY16 cargo loads were stronger than 2QFY16’s 60.3%.

We expect 3QFY16’s substantial 1.7ppt load factor improvement to 80.0% to boost 3Q’s earnings.
In 3QFY15, parent airline SIA recorded S$87m in operating profit on pax loads of 78.3% and pax yields of 11.5 S cents.
We have assumed an 8% yoy decline in 2HFY16 pax yields (2QFY16: -4.6% yoy). Every 0.1 S cent rise in pax yield is expected to raise 2HFY16 and FY17 net profit by about S$46m and S$92.5m respectively.
Coupled with lower fuel costs, this should lead to improved profitability for SIA.

In 2QFY16, Scoot reported an operating loss of S$2m on load factor of 84.5%. Comparatively, Scoot delivered pax load factors of 86.0% in 3QFY16. Furthermore, Scoot’s pax yields have been relatively firm and in fact improved by 1.9% in 1HFY16. Thus, Scoot is likely to swing to profitability in 3QFY16 on higher loads, as well as cost savings from fuel and its fleet replacement programme.

We continue to value SIA at 1.0x FY17F SIA ex-SIAEC book value. We expect SIA’s earnings to be boosted by lower fuel costs and about a S$950m reduction in fuel hedging losses in FY17, leading to record FY17 net profits of S$1.5b, the highest in eight years. Every US$10/bbl decline in fuel cost is expected to lead to a S$517m rise in net profits.
We believe that P/B valuations should rise to at least 1x, given:
1. expected SIA ex-SIAEC’s FY17 ROE of 11% above its cost of equity,
2. potentially stabilising yields, and
3. the fact that the stock traded at 1.2x P/B in 2010 when earnings breached S$1b.
We re-iterate BUY, with a target price of S$14.00.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-13

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.00 Same 14.00