Aviation – Singapore - UOB Kay Hian 2017-01-31: 3QFY17 Results Preview ~ Expect A Lacklustre Quarter

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Aviation Sector SATS LTD. S58.SI SIA ENGINEERING CO LTD S59.SI SINGAPORE AIRLINES LTD C6L.SI SINGAPORE TECH ENGINEERING LTD S63.SI

Aviation – Singapore - 3QFY17 Results Preview ~ Expect A Lacklustre Quarter

• SIA and SATS will report 3QFY17 results on 7 Feb 17 and 9 Feb 17 respectively. 
• We expect a 36% yoy decline in net profit for SIA due to lower pax loads and yields, and SIAEC to report lower yoy operating profit. 
• Barring a sharp increase in staff costs, SATS could register a 4-6% yoy rise in operating profit amid lower revenue growth. Should SATS show improved cost control or operating leverage, this would have positive implications for future earnings growth. 
• Maintain MARKET WEIGHT.

WHAT’S NEW

• We preview the 3QFY17 results for Singapore Airlines (SIA SP) and SATS (SATS SP).

ESSENTIALS

SIA: Expect 3QFY17 net profit to decline 36% yoy on the back of lower pax loads and yields. 

• In 3QFY17, Singapore Airlines’ (SIA) pax loads fell 1.0ppt yoy in the traditionally peak travel period. While we envisage lower fuel hedging losses, we expect operating profit to decline due to lower loads and weak yields. 
• Meanwhile, we also do not expect an improvement in subsidiaries profits. 
• We have also assumed further losses from airline associates.

Assuming a 3.8% yoy decline in pax yields, similar to 2QFY17’s. 

• In 3QFY17, pax loads to the Southwest Pacific sector averaged 82.7%, declining by a whopping 4.7ppt yoy. 
• Meanwhile, loads to Europe also weakened during the quarter. 
• Given that traffic on these sectors typically consists of a greater proportion of premium traffic, we reckon premium yields could have weakened. Every 0.1 S cent decrease from our base pax yield estimate should lower PBT by about S$23m.

SIA Cargo could reverse to black. 

• Cargo load factor rose 0.9ppt yoy in 3QFY17 and was also substantially higher qoq (+4.7ppt). Coupled with strong demand on North American routes, this could have led to a marginal improvement in yields. 
• We estimate a S$19m operating profit vs an S$11m loss in 2QFY17.

Key numbers for SIA. 

• The extent of yield erosion amid declining load factors will be a key focus. If the decline in yields accelerates, it will indicate weakening competitive position. That said, there are signs that competition from the Middle Eastern airlines could abate somewhat as carriers such as Emirates has embarked on cost rationalisation and could cut capacity growth. 
• We would also look out for signs of lower losses from Virgin Australia and Vistara.

SIA Engineering: Operating profit likely to continue to decline. 

• SIAEC’s profitability is driven by line maintenance revenue, which in turn is dependent on flight arrivals at Changi. 
• While 3QFY17 could see a slight seasonal uplift with line maintenance profits improving qoq (flight movements in 3QFY17 rose 3.7% yoy vs 2QFY17’s 3.3% yoy), it may not be sufficient to offset losses at the repair and overhaul segment, which was in the red in 1HFY17.

SATS: Expecting 3QFY17 operating profit to rise 4-6% yoy, barring a sharp increase in staff costs. 

• We estimate a 2-4% yoy rise in 3QFY17 net profit. We are guided by Changi’s pax throughput numbers, which rose 4.8% yoy during the quarter.
• Our 9MFY17 estimates are broadly in line with consensus full-year estimates (+10.7% yoy). We expect SATS to register lower top-line growth due to: 
  1. a higher base in gateway services revenue (prior quarters were boosted by the resumption of JetStar Asia contract), and 
  2. lower TFK revenue growth. 
• Still, we expect 3QFY17 operating margin to be comparable to 2QFY17’s. We have assumed a 1% yoy increase in staff costs. Every 1% increase from our base staff cost assumption should lower our 3QFY17 PBT estimate by 3.5%.

Key numbers for SATS. 

• The extent of the staff cost increase and operating leverage will be key factors. Staff costs have risen yoy for four consecutive quarters. While SATS has indicated a shift towards increased automation and technology to reduce the reliance on labour, it remains to be seen to what extent staff costs could be managed. 
• In addition, SATS’ ability to generate higher margins is contingent on the degree of operating leverage it can achieve. In 2QFY17, 28% of the increase in revenue flowed through to the operating level and we have estimated a 60% flow through in 3QFY17. Should SATS demonstrate greater operating leverage, this would indicate increased operating efficiencies. 
• We would also be looking out for and will query management on the impact of a weaker S$ on raw material costs.

STOCK CATALYSTS

• Higher-than-expected earnings, yields, ASP and margins.

EARNINGS REVISION/RISK

• There are no changes to our earnings estimates for SIA and SATS. 
• SATS continued to outperform ytd, and over the past three months, the stock is trading at +2SD to long-term mean PE. The stock is also trading at 24x 2017F PE, substantially above peers’. 
• Our HOLD recommendation for SATS is under review, pending 3QFY17 results.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-31

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