SIA
SINGAPORE AIRLINES LTD
C6L.SI
Singapore Airlines - SIA more attractive after share price drop
- After falling 5.2% last Friday in the aftermath of the disappointing full-year results, SIA is trading just below book and is unlikely to fall much further.
- SIA is led by a visionary CEO who is pushing product quality forward, integrating Tigerair operationally in the group, and forging global airline partnerships.
- Unfortunately, investors may be focusing on its many short-term challenges.
- Hence we keep our Hold rating and our target price of S$12.42, still based on an CY16 P/BV of 1.1x (average since 2001).
Highlights of the analyst briefing
- SIA reiterated the many long-term initiatives that it is pursuing, including the introduction of new A350s this year, the ground-up development of new products for the A380s delivering in 2018, the reintroduction of non-stop US flights with the A350ULR from 2018, lounge refurbishments, integration with and between Scoot and Tigerair, and forging global airline partnerships. These will yield returns over time.
Near-term headaches
- In the near-term, however, SIA will face growing yield pressures, with the European situation described as "quite severe", and the transpacific also affected. Southeast Asian yield pressures were comparatively benign.
- Last year, average fuel prices fell US$33/bbl yoy (to US$84), which more than offset yield pressures. But this year, the absolute fuel price drop may more than halve to just US$13/bbl yoy (to US$71) just as the rate of yield declines picks up.
- Mainline SIA's profits could shrink in FY17.
Will SilkAir and Scoot continue to deliver better profits?
- Both units delivered stronger profits in FY16 on reasonable levels of yoy ASK growth (SilkAir: +9%; Scoot: +26%). But the planned acceleration of ASK growth in FY17 to 17% for SilkAir and to 51% for Scoot increases the risk of accelerated yield deflation that may or may not overwhelm the more modest drop in fuel prices. For instance, Scoot's to-be-introduced Amritsar and Jaipur flights could be challenging to turn profitable.
Cargo business very weak
- The air freight business is another near-term headache, as mirrored by the way container freight rates have collapsed to next-to-nothing. This is driven partly by overcapacity, and partly by the weakness in global trade growth. In this context, SIA Cargo's planned capacity expansion of 3-4% in FY17, due to passenger aircraft bellyhold expansion more than offsetting a reduction in its fleet of dedicated freighters from nine to seven 747Fs, is unhelpful.
Near-term catalysts missing from SIA
- As a result of the various challenges noted above, SIA's share price may struggle to perform until the global economy turns around in a more decisive fashion, leading to stronger premium travel and air freight demand.
- In the meantime, SIA will simply do what it does best and plan for a brighter future.
- Please click here for our earlier results review, where we had downgraded the recommendation from Add to Hold, reduced FY17-18 forecasts by 29-34%, and lowered the target price to S$12.42.
Raymond YAP CFA
CIMB Securities
|
http://research.itradecimb.com/
2016-05-15
CIMB Securities
SGX Stock
Analyst Report
12.42
Same
12.42
