Singapore Airlines (SIA SP) - UOB Kay Hian 2016-12-16: Pax Loads Continue To Decline In The Traditionally Peak Quarter

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-12-16: Pax Loads Continue To Decline In The Traditionally Peak Quarter SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Pax Loads Continue To Decline In The Traditionally Peak Quarter

  • The decline in SIA’s pax load factor accelerated in November despite the peak travel period. This was led by an 8ppt decline in loads to Southwest Pacific, which SIA attributed to industry capacity additions. 
  • This highlights the risk to SIA’s traffic on the Kangaroo route which will likely be exacerbated by the open skies agreement between China and Australia. Australia is an important originating market for SIA and loads on this sector could continue to fall. 
  • Maintain HOLD with target price of S$10.10. Entry level: S$8.90.



WHAT’S NEW


Parent SIA’s load factor decline accelerated in the peak season. 

  • Singapore Airlines’ (SIA) pax loads fell 1.9ppt (vs a 1.6ppt decline in Oct 16) on the back of a decline in pax traffic. At 76.9%, SIA’s loads were also the lowest in eight months. With the exception of Tigerair which registered flat loads, pax load factors declined across all subsidiaries.

Scoot’s pax loads fell 4.5ppt, while SilkAir’s also weakened. 

  • The continued weakness in loads in the peak travel period does not bode well for peak 3Q earnings expectations.

Ytd, 8MFY17 stood at 77.9%, in line with our full year estimates of 78%.

  • SIA Cargo’s loads also did not improve as cargo traffic growth slowed to a mere 3.4% from Oct 16’s 10% growth. Aside for East Asia, cargo loads declined across all other regions. We reckon cargo yields will likely remain weak.


STOCK IMPACT


Pax loads to Southwest Pacific fell 8ppt, highlighting the risk to SIA’s traffic on the Kangaroo route. 

  • SIA attributed the decline to “material increases in industry capacity”.
  • We reckon this was due to capacity additions by the Big 3 Chinese carriers, which seat capacities to Australia have risen by 12% in Dec 16 thus far. This will likely be exacerbated by the recent open skies agreement between China and Australia (4 Dec 16), which removes all capacity restrictions between the two countries. 
  • About 19% of SIA’s capacity in km-terms is directed towards Australia and we believe SIA’s loads on this sector will likely continue to fall.

Rising fuel prices could lead to higher into-plane fuel costs, offset by lower fuel hedging losses. 

  • Since end-Aug 16, jet fuel prices have risen 15% to US$65/bbl. Our full-year estimate implies into-plane jet fuel cost of US$65/bbl in 2HFY17. Should fuel prices rise further, this will result in higher into-plane fuel costs, partly offset by lower fuel hedging losses or possibly even fuel hedging gains. 
  • As at 2QFY17, SIA had hedged 29% of its 2HFY17 jet fuel requirements at US$68/bbl and 3% at US$63 on Brent.


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, or 1SD below mean P/B. Suggested entry price is 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/ 2016-12-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100




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