Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-04: 2QFY17 Slightly Above Expectations On Lower Cargo Losses

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-05: 2QFY17: Slightly Above Expectations On Lower Cargo Losses SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 2QFY17: Slightly Above Expectations On Lower Cargo Losses

  • SIA’s 2QFY17 net profit was slightly better than expected due to lower cargo losses.
  • Key positives were lower associate losses, lower cargo losses, as well as the sequential decline in fuel hedging levels. 
  • Meanwhile, SIA continued to warn of weak global economic conditions and indicated that cargo yields will likely remain under pressure. 
  • We are neutral on the results and will provide further updates after the analyst briefing. 
  • Maintain HOLD. Target Price: S$10.00. Entry price: S$9.00.


RESULTS


2QFY17 net profit was slightly better than expected due to lower cargo losses.

  • Singapore Airlines’ (SIA) headline net profit was just S$10.9m higher than our estimate, but the numbers included: 
    1. S$11.0m in non-operating losses, 
    2. an additional S$6.9m charge upon the revision of its depreciation policy on engine overhauls. 
  • Excluding 2QFY16’s S$91.1m in dividends from investments, core net profit would have declined 47% yoy. 
  • Cargo losses were also substantially lower than expected as unit cost fell at a larger-than-expected rate. 
  • Pax yield fell by 4% yoy as expected, while unit cost at 8.1 S cents was also within our expectation. However parent airline’s profits were higher, presumably due to higher bellyhold revenue. 
  • SIA also declared an interim dividend of 9 S cents, vs 10 S cents previously.
  • Key positives are: 
    1. sequentially lower cargo losses and lower fuel hedging levels, and 
    2. lower associate losses. 
  • Airline associate and JV losses halved to $32m qoq, while SIA’s fuel hedging levels sequentially declined. For 2HFY17, SIA hedged 29% of its fuel requirements at US$68/bbl and an additional 3% on Brent at US$63/bbl, much lower than the 2QFY17 and 1QFY17 levels (2QFY17: 37.5% at US$81, 1QFY17: 42% at US$87). 2QFY17 group fuel hedging losses remained largely flat at S$146m qoq.
  • Operating cash flow excluding working capital changes rose 14% yoy in 1HFY17, but FCF declined 46% yoy due to a sharp rise in capex. Cash and equivalents fell by S$568m or 12% in 1HFY17, from end-FY16’s S$4.64b.
  • Book value rose 2% to S$11.20 from S$10.96, primarily due to lower fuel derivative liabilities.
  • Subsidiary airlines’ profits were lifted by Scoot, while SilkAir’s profits declined as expected on lower yields. Despite a 7.4% decline in Scoot’s yields, Scoot reversed from losses compared with the previous year, while 2QFY17 profits were also higher qoq. We reckon this was due to higher incidental revenue as well as lower fuel costs. SilkAir similarly benefitted from lower fuel costs, but the 6.8% decline in yields led to the 19% decline in SilkAir’s profit.


STOCK IMPACT

  • Although 2QFY17 profits are slightly better than expected, we are neutral on the results. SIA indicated that the airline business continues to be impacted by weak global economic conditions, while cargo yields are expected to remain under pressure. We will provide further updates after the analyst briefing.


EARNINGS REVISION/RISK

  • No change to our earnings estimates, pending the analyst briefing.


VALUATION/RECOMMENDATION

  • Maintain HOLD with a target price of S$10.00. We continue to value SIA at 0.73x FY17F book value ex-SIAEC, 1-SD below mean P/B.


SHARE PRICE CATALYST

  • Improving pax and cargo yields.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-05
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.000 Same 10.000




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