Singapore Airlines - DBS Research 2017-02-08: Core earnings in line

Singapore Airlines - DBS Vickers 2017-02-08: Core earnings in line SINGAPORE AIRLINES LTD C6L.SI

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.


Valuation

  • 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.




Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-02-08
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Down 10.200





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