Singapore Airlines (SIA SP) - Maybank Kim Eng 2016-11-04: Warning bells are ringing

Singapore Airlines (SIA SP) - Maybank Kim Eng 2016-11-04: Warning bells are ringing SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Warning bells are ringing


Rising competition in the long-haul segment 

  • SIA’s 2QFY17 was well below our forecast by half, which already was the lowest on the Street. 
  • Yields tumbled, load factor dipped and contributions from associates plummeted. Things are not looking good going forward either. 
  • We maintain unchanged our earnings forecasts, HOLD rating and TP of SGD9.70 (pegged to its long-term P/BV mean of 0.86x) pending the analyst briefing later today.


Nothing seems to work! 

  • 2QFY17 core earnings of SGD88m (-58% YoY, -15.5% QoQ) was below ours and consensus expectation. The 1HFY17 core earnings make up only 29% of our full-year FY17 forecast and the outlook statement by management hardly provides comfort. 
  • The key pressures are rising competition in the long-haul market and increasingly budget conscious customers.


Management needs to have a hard look 

  • We are concerned over the long-term outlook for the group. 
  • The parent airline is on a secular decline, the flight network is shrinking, and so is the yield. 
  • Only the budget carriers, namely Scoot and Tigerair, are holding up well and show some signs of long-term growth. Otherwise, the business is shrinking and management might have to rethink its growth plans going forward.


Nothing to be upbeat about 

  • We don’t see any positive investment case for SIA in the short term horizon as the supply-demand balance is not favourable and it is struggling with competition. However, it is trading close to its floor valuation of 0.86x, indicating the risks have been largely 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/ 2016-11-04
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.700 Same 9.700




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