Singapore Airlines - Maybank Kim Eng 2016-05-16: Always on the back foot

SIA SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Always on the back foot

SIA’s 4QFY16 and FY16 results were way below ours and consensus expectations.
Yields were much weaker and the cargo business continued to lose money?. However, to its credit, SIA has achieved credible unit cost reduction through efficiency gains.
We lower our FY17-18 forecasts by -3.2% and -6.7%, respectively to incorporate its latest fuel hedges and lower yields, and introduce a FY19 forecast.

Maintain HOLD with a 2.5% lower TP of SGD11.5 (from SGD11.8), pegged to an unchanged 1x FY17 P/BV, which is SIA’s historical mean.

Central to SIA’s quandary are the three giant Middle Eastern carriers, which have made commanding inroads into the premium segment.
Secondly, all the mainline Chinese carriers have splurged capacity on trans-Pacific flights and this has hurt SIA’s market share, as well as marginalize its cargo segment. These pressures are unlikely to abate anytime soon, in our view.
The bright sparks were Silkair and Scoot, which delivered strong YoY growth. Tigerair also breakeven in FY16.

We forecast overall yields (passenger + cargo) to erode by a further 3.7% in FY17 as the long-haul sector continues to face stiff competition. However, we forecast unit cost to decline by 4.2% YoY in FY17 as SIA enjoys the benefit of the lower fuel price as its expensive fuel hedges expire.
SIA will also derive some cost savings on the planned removal of two older Boeing B747-4F, one Boeing B777-3 and four Airbus A330-3, and replace them with ultra-modern and efficient new aircraft models.

SIA announced a DPS of SGD0.35 (+106% YoY), bringing the full-year total to SGD0.45 (+105% YoY).
Its 65% payout ratio is among the highest in the industry and the current dividend yield of 4.0% will appeal to certain investors and provide downside support to the share price.

Management expects an extremely challenging operating environment for the year.
The Middle Eastern and also Chinese carriers are growing at a fast pace and hurting the yields on the premium segment.
The budget segment is more resilient and is growing strongly.
The core growth markets for SIA are India and China. Management is optimistic regarding buoyant demand in these two countries, driven by a strong domestic economy, a resurgence of the middle income class population, and a rapidly globalizing economy.
We agree with management’s views that India and China are indeed the new ‘big market’ for a long time to come.

There will be a net addition of ten aircraft in FY17, with the addition of 17 aircraft and the removal of seven older aircraft from the fleet. This includes the decommissioning of two freighter aircraft, its first reduction since 2011.
SIA will induct the ultra-modern Airbus A350 and Boeing 787 aircraft models, whilst removing the older Boeing 777-3, Airbus A330-3, and Boeing 747-4F. This fleet rejuvenation should help reduce unit cost and possibly appeal to more customers.
We are positive with management’s action to rejuvenate its fleet, as SIA has the oldest average fleet age of any state carrier in the ASEAN region. But we are concerned with the high number of net fleet additions in FY17. For the past five years, SIA has typically only grown its fleet by 3-5 aircraft p.a.. Therefore, we think there is a high probability that SIA will return five leased Airbus A380 aircraft that are due to expire to the lessor in 2017.
There were plenty of questions regarding the A380 aircraft status, but management was adamant that it has yet to reach such a decision.

There has been wide speculation in the press that Tigerair and Scoot will be merged soon, which management has not denied nor confirmed.
We believe it will eventually happen, and the real question is when? In our opinion, it would be mutually beneficial longer-term, assuming they can streamline operations and reduce the overlapping staff functions. Should the merger story occur, we think it could potentially improve the sentiment on the counter.

Yield is the most important earnings driver, but the trend has been negative for the past three years.
Low fuel price is providing a significant cost reduction and boost to the bottom line.
Strong demand and supply scarcity in the region should drive up loads and yields in the medium term.

Tigerair acquisition is costly and the market is keen to see how it extracts value to benefit the Group.
An increase in the value of the SGD against destination countries and the USD will have an adverse effect on yields.
Increased competitive pressure from the Middle Eastern carriers and also from regional peers who have upgraded their fleets and services.

Mohshin Aziz Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-16

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 11.50 Down 11.80