Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-16: Weak Start To 3QFY17

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-11-16: Weak Start To 3QFY17 SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Weak Start To 3QFY17

  • October’s pax load factors fell across the board. SIA’s pax load declined 1.6ppt while Scoot’s fell by a whopping 10.1ppt to the lowest level in two years.
  • The street is expecting a stronger 2HFY17 and the weak October numbers in a traditionally peak quarter do not bode well for 3QFY17 earnings. 
  • Meanwhile, a stronger US$ will lead to a rise in capital commitments and negatively impact balance sheet. 
  • Maintain HOLD but we lower our entry price by 6% to S$8.90. Target price: S$10.10.


WHAT’S NEW


Weak October numbers cast a pall over peak 3Q earnings expectations. 

  • Pax load factors declined across the board, with parent airline’s loads falling by 1.6ppt on the back of a 3% decline in pax traffic. SIA attributed the decline in loads to “softer passenger demand”.
  • In addition, Scoot’s pax loads fell by a whopping 10.1ppt, while both SilkAir and Tigerair’s also weakened. Scoot’s pax loads at 75.1% was also the lowest in 2 years. 3Q is a traditionally peak period and the street expects earnings to improve in 2HFY17. The weak October numbers do not add to confidence.
  • The key positive is SIA’s cargo loads, which improved by 1.2ppt, on the back of a 7.7% rise in traffic. The improvement in cargo loads was led by higher loads across the East Asia, Americas and Europe sectors. However, we reckon that cargo yields will likely remain weak.


STOCK IMPACT

  • SIA is generally a beneficiary of weaker S$ but an appreciation in US$ is detrimental to balance sheet. We had previously highlighted that SIA will go into a net debt position due to its substantial capex requirements, but the level of debt required will likely rise given the strong US dollar. 
  • Along with operating lease commitments and SIA’s share of associate and JV capex, SIA’s capital commitments stood at S$33b as at endFY16. Since then, the US dollar had strengthened by 4.7% against the Singapore dollar.
  • Given that aircraft capex and operating leases are denominated in US dollars, any strengthening of the greenback will lead to a rise in capital requirements.


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$10.10. We continue to value SIA at 0.7x FY17F core book value ex-SIAEC, 1SD below mean P/B. Suggested entry price: S$8.90.


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/ 2016-11-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100




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