Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-19: 4QFY17 Shock Earnings Miss Amid Yields And Cost Mismatch

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-19: 4QFY17: Shock Earnings Miss Amid Yields And Cost Mismatch SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 4QFY17: Shock Earnings Miss Amid Yields And Cost Mismatch

  • SIA surprised with a loss of S$138m vs our expectation of an $8m profit as the parent airline swung to a loss. 
  • While SIA managed to boost load factor, this was achieved at the expense of yields, which fell by a whopping 7.5% yoy in Feb 17. 
  • SIA and other regional carriers need to cut capacity to boost yields. 
  • Maintain HOLD. But we cut our target price to S$10.10, still valuing SIA at 0.7x FY18F book value-ex SIAEC.



RESULTS


4QFY17 earnings sharply below our and consensus estimates of S$7.8m and S$27m. 

  • The steep earnings variance was due to losses at the parent airline, whose yields deteriorated by a greater amount than expected, while costs accelerated. 
  • Yields took a sharp dive in February, before recovering in March. In the previous two quarters, parent airline’s operating profit had declined by only 19% and 16% respectively. This comes as a surprise as load factors had improved in 4QFY17 by 2.1ppt, compared to declines in the past two quarters. 
  • It appears that SIA had been too aggressive in discounting fares at the expense of loads and at the same time faced a 52% increase in plane fuel cost. 
  • Non-fuel cost also rose by 5% during the period. Provision relating to cargo price fixing was also higher at S$132m vs S$112m mentioned previously.
  • SIA declared 11 S cents in final dividend (4QFY16: 35 S cents), but payout ratio remains unchanged at 65%.

SilkAir and budget carriers (TigerAir and Scoot) generated S$27m and S$22m in operating profit as unit cost declined 7.8% and 9.4% respectively. 

  • Their earnings stand in stark contrast to that of the parent airline, even as load factors were mostly flat for the period. SIA Cargo’s losses narrowed as pace of yield decline fell to the lowest level in 8 quarters. Airline associates losses widened by 8% yoy in 4QFY17 to S$26m.

Warns of continued yield pressure and plans for next phase of transformation. 

  • The carrier will be reviewing its network, fleet and product and services with a view towards achieving longer term sustainable growth


STOCK IMPACT


First 4Q loss in 3 years, SIA needs to rationalise capacity on unprofitable routes.

  • Parent airline’s profitability stands in stark contrast to that of SilkAir and budget carriers.
  • We believe the losses could be due to a steep 7.5% decline in pax yields in February.
  • While the rate of decline subsequently narrowed to 4.8% in March, we are unsure if the improvement will continue. We believe that SIA’s strategy of aggressive price discounting is not sustainable and the carrier needs to rationalise unprofitable routes, cut capacity or frequency to improve yields and profits. We will seek guidance on SIA’s strategy at the analyst briefing and will provide a further update.

At current yield levels, very few full-service carriers will be profitable. 

  • Airlines will have to cut capacity cuts or delivery deferments, until the yield environment improves.
  • There are already signs of capacity cuts by the Chinese and the Middle Eastern Airlines.
  • Emirates, for example, has cut capacity to the US by 20%. The carriers recently reported a 70% decline in full-year profits and an 82% decline in airline profits, amid a 7% decline in pax yields for the year.

Stock price will react negatively to the earnings miss. 

  • At $10.10, the stock will be trading at 0.7x FY18F book value, ex SIAEC.


EARNINGS REVISION/RISK

  • We have temporarily revised our FY18 numbers but will tweak the same following an analyst meeting later today.


VALUATION/RECOMMENDATION

  • We lower our fair value to S$10.10, valuing the stock at 0.7x FY18F book value.


SHARE PRICE CATALYST

  • Capacity cuts across the industry.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-19
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.10 Down 10.400



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