Singapore Airlines (SIA SP) - 3QFY17 Analyst Briefing Takeaways: Too Early For Optimism
- SIA’s longer-dated Brent hedges are at attractive levels close to spot, and this could give SIA a competitive edge if fuel prices rise substantially. However, both SIA and SilkAir’s yield declines worsened qoq, and cargo profits are not expected to be sustainable.
- For now, we will await clearer signs of lower airline capacity additions and further consolidation in the container shipping space for a meaningful recovery.
- Maintain HOLD with a higher target price of S$10.40. Suggested entry price: S$9.60.
- Takeaways from analyst briefing are as follows:
Cargo profits not expected to be sustainable, but losses should narrow.
- Singapore Airlines (SIA) indicated that the improvement in cargo was broad-based across sectors on long-haul routes to/from North America, Europe and Australia, and partly due to the grounding of Hanjin container vessels.
- SIA also benefitted from higher engine aircraft and pharmaceutical shipments.
- While management does not expect the recovery to persist, we believe that cargo losses could narrow in coming quarters as cargo yields stabilise and hedging losses decline.
Yields likely to remain under pressure.
- SIA attributed the 5.5% decline in pax yields to overcapacity and indicated that yields, especially on back-end, continue to be under pressure and promotions to stimulate demand will continue. Yields from the Europe sector were also affected as the weaker sterling impacted leisure travel from UK.
- In addition, the airline also warned that the environment remains competitive which resulted in price discounting to fill seats.
- SIA indicated that the extent to which yields will correlate with fuel prices would largely be dependent on capacity additions.
Long-dated Brent hedges are at relatively attractive levels, with low premium to spot.
- SIA has hedged 33-39% of fuel requirements on Brent at US$53-59/bbl till 2022.
- SIA indicated that this is in order to lock down a portion of fuel costs at attractive levels on a 5-year rolling basis, but the carrier will continue to add on jet fuel hedges for shorter periods.
Potential for further impairment charges relating to TigerAir.
- The S$79m impairment charge recognised in 3QFY17 results related to the writedown of the TigerAir brand. While SIA did not disclose the exact quantum, there is still remaining goodwill for the purchase of TigerAir.
- Given that SIA bought the remaining stake in TigerAir for approximately 5.5x book, we believe there is a possibility of further writedowns, which could be progressively recognised in coming quarters. We have not imputed this into our numbers.
Pace of airline-associate losses declined qoq.
- SIA attributed the improvement in Virgin Australia and Vistara to a seasonal uplift, but losses for the two carriers were largely flat yoy.
Brent hedges are at attractive levels and could give SIA an advantage in the event prices escalate.
- SIA had previously hedged primarily on jet fuel and only up to 24 months due to an illiquid market. SIA’s move will likely be closely watched by its competitors and could potentially lead to similar moves.
Too early to be optimistic.
- The fact remains that both parent airline and SilkAir’s decline in yields have worsened qoq. We had highlighted that capacity cuts by Emirates would be a positive sign but we have yet to see any signs of improved pricing.
- Chinese airlines are similarly dumping fares, particularly on South West Pacific routes. SIA’s only recourse is to focus on premium cabins and to this effect, it is increasing the proportion of premium-economy seating. This could stem the decline in yield.
- For now, we will await clearer signs of lower airline capacity additions as well as further consolidation in the container shipping space for any meaningful recovery in the cargo space.
- There are minimal changes to our net profit estimates.
- Maintain HOLD with a higher target price of S$10.40 (previous: S$10.10), as we roll forward our valuations to FY18.
- We continue to value SIA at 0.7x book value ex-SIAEC, 1-SD below mean P/B.
- Suggested entry price is S$9.60 based on a 10% total return inclusive of dividends.
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- No immediate catalyst.