Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-05: 4QFY17 Results Preview ~ Core Net Profit To Rise 25% yoy

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-05: 4QFY17 Results Preview ~ Core Net Profit To Rise 25% yoy SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 4QFY17 Results Preview ~ Core Net Profit To Rise 25% yoy

  • SIA will report results on 18 May. We estimate a 25% yoy rise in 4QFY17 core earnings on higher pax loads and improving cargo profitability. 
  • Potential earnings surprises could come from further write-down on the TigerAir brand or higher pax yields. 
  • Share price could re-rate if cargo losses swing into a substantial profit or airline associate losses narrow significantly. A re-rating to 0.8x P/B should lead to a rise towards S$11.10 levels. 
  • Maintain HOLD. Target price: S$10.40.



WHAT'S NEW


We expect 4QFY17 core net profit to rise 25% yoy

  • We expect 4QFY17 core net profit to rise 25% yoy on higher pax loads and improving cargo profitability. 
  • Consensus’ full-year numbers imply a 4QFY17 core net profit of S$170m or a 41% rise. At the group level, we expect operating profit growth to be driven by: 
    1. higher profits at parent airline, and 
    2. improving cargo profitability. 
  • We have also assumed marginal fuel hedging gains. 
  • At the non-operating level, we have imputed S$112m in provisions for cargo fines, which SIA has announced, and a further S$31m in impairment of TigerAir brand. 
  • We estimate that SIA will declare 15 S cents in final dividend (inclusive of 5 S cents special).


Key numbers we would be looking out for: 

  1. Pax yield. We have assumed that the rate of decline in pax yield would narrow sequentially from 5.5% in 3Q to 3.3% in 4Q. The sequential improvement is premised on higher front-end loads on long-haul routes. In 4QFY17, load factors out of Europe rose yoy (+4.4ppt). Every 0.1 S cent rise from our base yield assumption should lead to about S$23m rise in net profit.
  2. Cargo profitability. Cargo operations swung into the black in 3QFY17 on the back of strong yields, due to the Hanjin bankruptcy. There are signs of improving demand. While SIA’s own cargo traffic improved by only 2.5%, IATA notes that global cargo traffic on a seasonally adjusted basis has risen by 11% for the quarter.
    For the Asia-Pacific region, international air cargo traffic grew by 10.9%, outpacing capacity growth of 3.6% for the quarter. This should bode well for cargo yields. Air cargo yields as monitored by Drewry showed an average 8% rise in yields for the East-West routes.
  3. Associates’ profitability. SIA’s share of airline associate losses amounted to S$113m as at 9MFY16, amounting to 41% of core parent airline’s operating profit. A key positive is that losses have been declining on a sequential basis. An improvement in associate profits, particularly at its Indian associate, Vistara will aid shareholder confidence.


STOCK IMPACT

  • We expect SIA to meet consensus earnings expectations, at least on the operating level. Potential negative surprises could come from further write-down on impairments from TigerAir (we have assumed an additional S$31m), or weak earnings from airline associates. Positive surprises could come from stable pax yields. There is a possibility that yields could decline by much less than the 3.3% decline that we have estimated, if SIA’s front-end loads were stronger on long-haul routes for the period.
  • Potential for re-rating if cargo losses swing into a significant profit, airline associate losses narrow substantially or yields improve by a better-than-expected quantum. At present, SIA is trading close to our target price of S$10.40 and we had previously highlighted that the stock was likely to reach our target price in the run-up to full-year results. If we value SIA at 0.8x P/B, then fair value could rise towards S$11.10.
  • SIA’s likely move into net debt in FY18 should not come as a surprise. Over the past three years, we had repeatedly highlighted that SIA’s cash hoard of S$4b-5b was not a reason to be bullish on the stock given its relatively high capital commitments. This, along with low operating cash flow and poor residual value on aircraft, had lowered FCF. Thus the street should not be surprised with SIA’s debt profile, which is still significantly better than that of its competitors. We have assumed S$3.1b (+87%) in incremental debt in FY18 to fund capex commitments and expect 2018F net debt/equity of 11%.


EARNINGS REVISION/RISK

  • We have lowered our 2017 net profit estimate slightly by 1.4% as we assume additional impairment on TigerAir brand but stronger cargo profitability.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$10.40. 
  • We continue to value SIA at 0.7x FY18F core book value ex-SIAEC, or 1SD below mean P/B.


SHARE PRICE CATALYST

  • Improving cargo and pax yields, and higher loads.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-05
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.400 Same 10.400



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