Singapore Airlines (SIA SP) - 3QFY17 disappoints
Cargo profit surge masks underlying weakness
- SIA’s 3QFY17 was below ours and consensus expectations. Yields were distinctively weak owing to intense competition and overcapacity. Costs were in order thanks to lower fuel hedging losses and productivity gains.
- The cargo unit surprised on the upside with the best performance in nine years.
- We keep our earnings forecast, HOLD call and TP of SGD of 9.70 (pegged to its long-term mean of 0.86x) unchanged pending the analyst briefing later today.
Hit by weak yields
- 3QFY17 core earnings was SGD265m (+11.3% YoY, +200% QoQ) was below ours and consensus expectation. The 9MFY17 core earnings of SGD457m (+6.3% YoY) make up 69% and 66% of ours and consensus full year FY17 forecast.
- 4QFY17 guidance is unenthusiastic and SIA is unlikely to meet with our forecast.
- Key pressure is rising competition on the long-haul market and customers increasingly becoming budget conscious.
Management taking further risk mitigation steps
- Management has hedged 33-39% of fuel needs up to 2022 at average prices ranging from USD53-59/bbl. This is a departure from its 18-months forward hedging strategy. Nonetheless, we applaud the management for taking this bold measure as it improves its cost visibility going forward.
- There are other more attractive airlines SIA’s misfortunes are due to market overcrowding on its key markets. This is structural in nature and despite management’s best efforts; they don’t seem to have an answer for it. It is very likely that the current mid single-digit net profit margins and ROEs is what SIA could hope for in the future. That said, it’s best to avoid SIA for other airlines with superior financial returns.
- Yield is the most important earnings driver, and the trend has been negative for the past three years.
- Low fuel price is providing significant cost reduction and bottom line boost.
- Strong demand and supply scarcity in the region should drive up loads and yields in the medium term.
- Tigerair acquisition is costly and the market is keen to see how it extracts value to the Group.
- FX volatility of SGD against destination countries and the USD will have an adverse effect on yields.
- Increased competitive pressure from the Middle Eastern carriers and also from regional peers who have upgraded their fleets and services.