Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-07: 2QFY17 Analyst Briefing Takeaways: Cloudy Skies Ahead

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-07: 2QFY17 Analyst Briefing Takeaways: Cloudy Skies Ahead SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 2QFY17 Analyst Briefing Takeaways: Cloudy Skies Ahead

  • SIA has S$17b of capex commitments over the next four years. This will mandate debt funding or increased sale-and-leasebacks, given the tight widebodied aircraft resale market. 
  • We estimate that OCF will fund less than 50% of capex over the next three years and we expect SIA to go from net cash into net debt position. 
  • Although we expect profitability to improve in 2HFY17 on the back of lower fuel hedging losses, we do not envisage a near-term re-rating catalyst. 
  • Maintain HOLD. Target price: S$10.10. Suggested entry price: S$9.50.


WHAT’S NEW 

  • Takeaways from the analyst briefing are as follows:

Premium bookings remain stable, though premium yields are under pressure. 

  • SIA indicated that corporate travel was affected by the offshore and marine downturn as well as job attritions in the financial sector. However, this was offset by growth in the consultancy sector and premium leisure travel.

Will return two freighters, which could boost cargo loads and profitability. 

  • SIA Cargo will return two B747-700F freighters by end-FY17, bringing down cargo capacity by about 22%. 
  • Meanwhile, SIA opined that the pace of cargo yield decline appears to be stabilising. 
  • Combined with the reduction in capacity, we believe that cargo losses will likely narrow in coming quarters.

Integration of Scoot and Tigerair not a surprise, prelude to a public offering? 

  • The two carriers will be integrated into a single brand and airline in 2H2017. This is expected to lead to cost savings and incremental revenue. SIA cited examples such as combining check-in counters and marketing under a single brand. We believe that SIA could potentially list its low-cost arm to improve its liquidity position.


STOCK IMPACT


2Q results were relatively good considering the circumstances, but there is no denying the challenges ahead. 

  • Higher local unemployment and greater long-haul capacity additions by neighbouring countries are key challenges that SIA is likely to face over the next few years. Much of SIA's fleet are optimised for long-haul operations and traffic on such routes are much more vulnerable to economic downturns and capacity additions. 
  • We believe that SIA is mindful of the challenges and will attempt to cut capacity.

However, the biggest challenge SIA faces is one of liquidity. 

  • The airline has S$17b of capex over the next four years and we estimate that operating cash flow will only fund 50% of capex and this excludes future investment in some of its airline associates. The resale market for wide-bodied aircraft is practically tight and thus SIA would either have to take on more debt to fund its capex or opt for higher sale and leasebacks. The latter would however affect profitability. 
  • We have assumed that SIA will require S$2.8b and S$2.1b of debt funding in FY18 and FY19 respectively. We have also reduced our dividend payout assumptions to 50% (including special dividend from disposal) and lower total dividend by 8% to 25 S cents. Under such a scenario, we question the need for aggressive share purchases. 
  • We don't envision a catalyst for a re-rating; however we believe that 2HFY17's earnings will improve as fuel hedging losses narrow substantially. There is also likely to be seasonal improvement in pax yields. 
  • We also believe that cargo losses are likely to narrow as SIA returns two of its freighters and takes on more bellyhold cargo. 


EARNINGS REVISION/RISK

  • We raise our FY17 net profit estimates by 22% as we factor in lower level and quantum of fuel hedges (2HFY17: hedged 29% of jet fuel requirements at US$68/bbl and 3% at US$63/bbl on Brent) and improving cargo profitability. 
  • We also raise FY17 net profit estimate by 55% to S$500m as we factor in lower level and quantum of fuel hedges. 


VALUATION/RECOMMENDATION

  • Maintain HOLD but with marginally higher target price of S$10.10 (previous: S$10.00), following our revised earnings estimates. 
  • We continue to value SIA at 0.7x FY17F book value ex-SIAEC, 1-SD below mean P/B. Suggested entry price: S$9.50. 


SHARE PRICE CATALYST

  • No immediate catalyst. 




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-07
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.10 Up 10.000




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