Singapore Airlines (SIA SP) - Maybank Kim Eng 2016-10-31: Long-haul to pinch 2QFY17 earnings

Singapore Airlines (SIA SP) - Maybank Kim Eng 2016-10-31: Long-haul to pinch 2QFY17 earnings SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Long-haul to pinch 2QFY17 earnings


Rising competition in the long-haul segment 

  • SIA’s 2QFY17 result (out on 3 Nov) is not looking good given the 1.5% YoY lower overall (passenger + cargo) load factor and tough yield outlook. 
  • We forecast 2QFY17 core net profit of SGD193m (-7.8% YoY, +85% QoQ), bringing 1H17 core net profit to SGD297m (+55% YoY). We deem this as below expectation, equal to 38% of our full-year FY17 forecast.
  • Accordingly, we cut our FY17-19 earnings forecast by 15.3%, 18.4%, and 19.1%, respectively on lower yield and load factor assumptions. 
  • Our TP has been slightly trimmed to SGD9.70 based on an unchanged FY17 P/BV of 0.86x, which is its long-term mean.


Uninspiring 2QFY17 statistics 

  • Long-haul traffic is under stress due to overcapacity and competitive pressures. 
  • Load factors have plummeted, especially to Europe and the Americas, which is consistent with statements made by other airlines in the region. 
  • SIA appeared to have deployed more capacity than the market was able to absorb; passenger capacity grew by 3.5% YoY, but traffic shrunk by 0.4% YoY causing a 3.2ppt YoY decline in load factor to 79.9%. This will have a negative impact on yields, we believe.


Some of management’s strategies are not convincing 

  • We are indifferent to management’s strategy to launch ultra-long haul flights to the US. 
  • Our analysis infers that it is not feasible and will be value destructing. 
  • Also, we are miffed with SIA’s low seat density configuration on its new aircraft as this raises the cost per seat at a time when SIA is struggling to raise its unit revenues. 
  • Overall, we think the mismatch between unit revenue and unit cost will worsen over time.


Nothing to be upbeat about 

  • We don’t see any positive investment case for SIA in the short-term horizon given that the supply-demand balance is not favourable and it is struggling with competition. However, it is trading close to its floor valuation, indicating the risks have all been priced in. 
  • Maintain HOLD.


Swing Factors


Upside

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

Downside

  • Tigerair acquisition is costly and the market is keen to see how it extracts value to the Group.
  • FX volatility of 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/ 2016-10-31
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.70 Down 10.000




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