Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-22: Analyst Briefing Takeaways ~ Will Transformation Plan Be A Panacea?

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-05-22: Analyst Briefing Takeaways ~ Will Transformation Plan Be A Panacea? SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Analyst Briefing Takeaways ~ Will Transformation Plan Be A Panacea?

  • SIA’s inability to pass on at least part of the fuel cost increases and a further 5% rise in parent airline’s non-fuel cost is troubling. 
  • While SIA announced plans to revamp its airline business, scant information was provided. For now, we continue to value SIA at 0.7x book value ex-SIAEC and rate the stock a HOLD as the street is already pricing in further earnings deterioration. 
  • Suggested entry level is $9.00. Cut target price to S$10.00.



WHAT’S NEW


Announces a transformational plan that would include a revamp the entire business. 

  • CEO Goh Choon Phong highlighted that SIA is undertaking a radical transformation, but did not give much details. Our sense is that SIA is still exploring options and does not have a concrete strategy to stem losses as yet. 
  • Details will be released within six months. SIA also indicated that it will still maintain its premium focus.

No plans to cut capacity but SIA plans better allocation of resources. 

  • From 4QFY17's results, it is clear that SIA operates long haul routes which are not profitable and aggressive price discounting to promote demand has not enhanced network connectivity in a profitable manner, despite improvement in load factors. 
  • Scoot and TigerAir, which are now held under a holding company, Budget Aviation Holdings (BAH) have fared better, but this is due to point-to-point traffic, rather than network connectivity between the two. 
  • SIA had long expressed hopes for its extensive network connectivity to boost regional connectivity and profits for SilkAir, however it appears that the costs and benefits are not in SIA’s favour.

Point of maximum pain? 

  • The only potentially positive takeaway is a comment that SIA’s management made about other airlines feeling the pain as well and that this could lead to saner pricing levels. 
  • But for that to happen, airlines must cut back capacity, which is easier said than done, given that both wide-bodied and narrow-bodied aircraft deliveries in 2016 were at record levels. ASCEND also notes that wide-bodied aircraft has been oversupplied since 2016.

Hedged 21% of FY18’s jet fuel requirements at US$66/bbl and a further 20% on Brent at US$53/bbl. 

  • For 1QFY18, SIA has hedged 39% of its jet fuel requirements at US$65/bbl. Jet fuel currently stands at US$60/bbl.

5-year capex commitments amount to S$30b. 

  • SIA’s debt-to-equity could rise to 70% by end-FY20, without further dividend cuts or aircraft sale and leasebacks. We have assumed that dividend payout for the next three years will decline to 40% from 65% in FY17.


STOCK IMPACT


Little reason to be hopeful. 

  • While we acknowledge that there is no quick fix to the solution of overcapacity, we are disappointed with the lack of concrete measures to address losses. This is especially critical given that SIA has substantial capital commitments.

What if fuel prices rise further? 

  • If yields do not move in tandem with fuel prices or if SIA continues to offer aggressive discounts, then losses will accelerate. 
  • For FY17, we have assumed that fuel cost will average US$70/bbl. Every US$1/bbl without a corresponding change in yield is estimated to lead to a S$60m variance in net profit.


EARNINGS REVISION/RISK

  • We lower our FY18 net profit by 7% as we assumed lower yields and factored in higher interest cost, arising from greater debt.


VALUATION/RECOMMENDATION

  • Maintain HOLD. The stock has declined by 7.2%, post results and is trading close to 0.7x book value, ex SIAEC. Following our earnings cut, we now tweak our target price down to S$10.00.


SHARE PRICE CATALYST

  • Capacity cuts across the industry.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-22
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.00 Down 10.100



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