Singapore Airlines - Core earnings in line
- Core earnings in line as EBIT rose by 2% y-o-y in 3QFY17 to S$293m on strong Cargo contribution.
- S$79m write-down on Tigerair brand led to net profit declining 36% y-o-y to S$177m.
- Earnings outlook remains patchy.
- Maintain HOLD, TP S$10.10.
Maintain HOLD; patchy outlook for the next few quarters.
- We remain neutral on Singapore Airlines (SIA) as its core earnings remain patchy amid a continued weak demand environment.
- We see weaker yields and higher operating costs eroding most or all the net fuel cost savings in the next few quarters ahead.
- We project fairly flattish core EBIT growth ahead for SIA. We have also lowered previously our DPS projection by 20% to 40 Scts per annum following a cut in interim dividend to 9 Scts in 1HFY17 despite an increase in earnings.
3Q core numbers in line; hit by one-off charge on write-down of Tigerair brand.
- SIA’s EBIT rose by 2% y-o-y to S$293m despite a decline of 2% on the group’s top line, as a very strong quarter for SIA Cargo (+S$50m) in a peak quarter helped offset weaker earnings at the core SIA passenger segment (-S$30m).
- Below the operating line, SIA recorded a non-operating loss of S$85m, which can be largely attributed to the S$79m writedown of the Tigerair brand and trademark following the announced merger of the LCC arms under the Scoot brand.
Weak demand, lower yields and higher non-fuel costs ate into fuel cost savings.
- While SIA has enjoyed lower fuel costs in the last few quarters, lower revenue as a result of lower yields (for both the core SIA passenger and cargo segments) and higher non-fuel costs such as MRO (maintenance, repair and overhaul) and staff costs have eaten into these savings.
- Amid a continued weak demand environment and sustained non-fuel cost pressures, we see the outlook for SIA’s operating earnings to be sluggish over the next few quarters.
- Our S$10.10 target price is based on 0.9x FY17 P/BV, which is at c. -1SD its historical mean and reflects the sluggish outlook for SIA with prospective core ROE of just 5.2%.
- Downside risk should be limited by the 4% dividend yield on offer.
Key Risks to Our View
- Higher oil prices a threat going into 2017. With oil prices having moved off their lows, and with OPEC seemingly moving to shore up prices, a substantial spike in jet fuel prices would negatively impact SIA’s profitability.