Singapore Airlines (SIA SP) - UOB Kay Hian 2016-10-27: 2QFY17 Results Preview ~ Expecting Weak Results

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-10-27: 2QFY17 Results Preview ~ Expecting Weak Results SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 2QFY17 Results Preview ~ Expecting Weak Results

  • SIA will report its results on 3 November and we estimate 2Q earnings will fall by 75% yoy due to weaker loads across the parent airline and all airline subsidiaries, weak pax yields and steeper cargo losses. 
  • Earnings will also vary depending on the degree of associate losses. 
  • We suggest investors top-slice their holdings ahead of results. 
  • Maintain HOLD. Target price: S$10.00. Entry level: S$9.00.



WHAT’S NEW

  • Expecting 2QFY17 net profit to decline 75% yoy due to: 
    1. lower pax loads, 
    2. weak pax yields, and 
    3. weak cargo yields. 
  • In 2QFY17, Singapore Airlines’ (SIA) pax loads fell 3.3ppt yoy (1QFY17: -0.9ppt). 
  • Along with weak yields, we expect the parent airline to report a yoy decline in operating profit. 
  • We also estimate that SIA will declare an interim dividend of 10 S cents, unchanged from 1HFY16’s. 
  • For the full year, we have assumed that SIA will pay out 65% of core earnings and 70% of EI gains from the sale of SIAEC’s investment in HAESL.

Estimate a 4.0% yoy decline in SIA’s pax yields (vs 1QFY17: -3.7% yoy). 

  • Given weakening loads in the Europe and Southwest Pacific sectors, we expect some erosion in premium traffic loads and yields. Job attritions in the financial sector could also have impacted front-end loads and consequently yields. We are also guided by Cathay Pacific’s (CX) profit warning for 2H16, citing deteriorating operating conditions and yields.
  • Every 0.1 S cent decrease from our base pax yield estimates should lower PBT by about S$24m.

Expecting unit cost to fall yoy on the back of lower fuel cost. 

  • We have assumed a 7% yoy decline in SIA’s unit cost, given that average jet fuel prices have fallen 11% from 2QFY16’s average. We have also assumed that SIA could report approximately S$200m in fuel hedging losses at the group level. 
  • Comparatively, we expect fuel costs to rise qoq due to higher into-plane fuel costs on the back of higher qoq jet fuel prices.

High likelihood of weak performance from subsidiaries. 

  • Load factors declined across all airline subsidiaries. With the possible exception of Tigerair (which was in the red for the previous year), we expect subsidiaries’ profits to decline. 
  • For SilkAir, we expect lower operating profit due to lower loads and weaker yields. 
  • In addition, SIAEC’s operating profit could also decline yoy on the back of lower airframe revenue due to lesser SIA-related work, as the carrier has decided not to renew some of its A380 leases.

SIA Cargo likely to be in the red. 

  • While cargo load factors improved slightly in 2QFY17, it was 0.8ppt lower qoq. In 1QFY17, cargo operations reported S$34m in losses on a 62% load factor and a 17% decline in yields. 
  • We have assumed a 3.2% qoq improvement in cargo yields but still expect relatively high cargo losses, due to a qoq increase in fuel costs.


STOCK IMPACT

  • In the wake of CX’s profit warning, we believe that SIA’s yields could also have been impacted over the past three months. Both carriers are exposed to the financial sector and highly reliant on premium traffic. CX’s profit warning on 12 October cited deteriorating business conditions since 1H16 and “heavy pressure on yields”. It remains to be seen to what extent SIA was also affected by a weakening environment. Should SIA’s pax yields decline by a greater quantum vs 1QFY17’s 3.7% decline, we believe the street will likely react negatively. 
  • Meanwhile, earnings will also be dependent on associate Virgin Australia’s performance. In 1QFY17, losses from associates amounted to a steep S$48m. While we have assumed lower associate losses in 2QFY17, SIA’s profitability could vary substantially depending on the degree of Virgin Australia’s losses.
  • Separately, SIA has also commenced non-stop flights to San Francisco via its new A350-900 aircraft on 23 October. Prior to this, SIA already had flights to San Francisco twice daily via Hong Kong and Seoul. Instead of increasing the frequency, the direct A350 flight to San Francisco will replace the Singapore-Seoul-San Francisco flight, which will be re-routed to Singapore-Seoul-Los Angeles. This suggests that SIA is cautiously gauging the demand for the non-stop flights before committing more capacity. We believe this is also in response to United Airlines’ launch of direct flights between Singapore-San Francisco in June in order to obtain market share. Whether the A350 will be a game changer remains to be seen, as incremental profits will be highly dependent on the loads achieved given the weak pax yield environment.


EARNINGS REVISION/RISK

  • There is no change to our net profit estimates. Our FY17 net profit estimate is 38% below consensus estimates.


VALUATION/RECOMMENDATION

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


SHARE PRICE CATALYST

  • Higher-than-expected pax and cargo yields.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-27
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.00 Same 10.000



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