Singapore Airlines (SIA SP) - UOB Kay Hian 2016-10-18: Weak Performance By SIA And Scoot Likely To Affect 2QFY17 Earnings

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-10-18: Weak Performance By SIA And Scoot Likely To Affect 2QFY17 Earnings SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Weak Performance By SIA And Scoot Likely To Affect 2QFY17 Earnings

  • SIA’s pax loads continued to fall for the fifth consecutive month in September on the back of declining traffic. Pax load factors also declined for both Scoot and SilkAir, with Scoot registering a sharp 4.9ppt drop. We reckon Scoot’s earnings will likely be lower qoq. 
  • Meanwhile, Cathay Pacific’s recent profit warning has negative implications for SIA and we believe SIA’s yields will likely remain weak in 2QFY17.
  • We will provide an earnings preview shortly. Maintain HOLD. Target price: S$10.00.


WHAT’S NEW


SIA’s 3.3ppt yoy decline in pax load factor in 2QFY17 is greater than 1QFY17’s decline (-0.4ppt). 

  • This suggests that SIA’s 2Q earnings could potentially be weaker qoq.
  • SIA’s loads also fell for the fifth consecutive month in September on the back of a declining pax traffic (-4% yoy). 
  • With the exception of East Asia, loads declined across all regions, led by Europe and South West Pacific. Both Europe and South West Pacific are key markets for Singapore Airlines (SIA) as they have relatively higher proportion of business traffic. This has negative implications on premium loads and we reckon that premium yields could also be affected.

Pax load factors also declined for both Scoot and Silkair. 

  • While Scoot continued to record traffic growth, its pax load fell sharply by 4.9ppt in Sep 16 as traffic growth lagged capacity expansion. Scoot’s 2QFY17 pax load of 81.3% was also lower than 1QFY17’s 82.3%. We reckon earnings are likely to be weaker qoq. SilkAir's pax load also declined yoy in Sep 16 and 2QFY17 as capacity expansion outpaced pax traffic growth.
  • Cargo load factor fell 0.5ppt in Sep 16 due to weaker loads in South West Pacific, West Asia and Africa. Meanwhile, cargo load factor rose 0.9ppt yoy in 2QFY17.
  • However, we reckon cargo yields could likely remain weak.


STOCK IMPACT

  • CX’s recent profit warning has negative implications for SIA. In 1H16, SIA’s pax yield fell 5% yoy while Cathay Pacific’s (CX) fell 10% yoy. CX’s greater yield decline was due to: a) stronger US$ and HK$, b) increased direct flights out of China, and c) greater exposure to the financial sector which saw job cuts and affected business/premium travel. At this stage, we are unsure whether SIA is sacrificing loads for higher yields.
  • However, we believe its pax yields are likely to remain weak. In 1QFY17, pax yield fell 3.7% yoy and we estimate 2QFY17’s pax yield could decline by at least the same quantum.


EARNINGS REVISION/RISK

  • No change to our earnings estimates. We will preview 2QFY17 earnings shortly.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$10.00. We continue to value SIA at 0.73x FY17F core book value ex-SIAEC, 1-SD below mean P/B. Suggested entry price is S$9.00.


SHARE PRICE CATALYST

  • Higher-than-expected pax yields and higher loads.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-18
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.00 Down 10.200



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