Singapore Airlines (SIA SP) - Maybank Kim Eng 2017-07-28: 1Q18 Flew Above Expectations

Singapore Airlines (SIA SP) - Maybank Kim Eng 2017-07-28: 1Q18 Flew Above Expectations SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 1Q18 Flew Above Expectations


Cargo was the dark horse, delivering solid profit 

  • SIA’s 1QFY18 core net profit was above ours and consensus expectations.
  • The passenger business performance was challenging, as expected, but the cargo business surprised positively and delivered solid profit. 
  • SIA appears to be handling the challenging market condition better than our initial expectation. We keep unchanged our earnings forecast, HOLD call and Target Price of SGD10.85 (pegged to its long-term P/BV mean of 0.93x) pending an analyst briefing next week.


Parent airline was strong, but budget lines fell short 

  • 1QFY18 core net profit of SGD155.6m (+49% YoY, 415% QoQ) is 38% of our and 40% of consensus full year forecasts. There was a one off compensation of SGD70m relating to changes in aircraft delivery slots.
  • The parent airline has performed strongly with 22% YoY growth in operating profit, but Silkair and Budget Aviation Holdings both struggled and were barely breakeven.


Cost management taking centrefold 

  • We are impressed with the company’s cost management in 1Q18. Unit cost grew by 1.4% YoY despite the fact that jet fuel prices rose by 8.3% YoY. 
  • There is scope for further unit cost reduction given that fuel price have receded and the benefits of the induction of new cost efficient aircraft.


Upside risk to consensus earnings 

  • We expect the street to adjust earnings estimates higher on these better than expected set of results. 
  • However, we caution that SIA is not exactly in the pink of health as the core net margin was a paltry 4% in 1Q and the cargo business unit could quickly turn as there is no evidence of a fundamental recovery in the freight market. Therefore, we maintain our HOLD call.


Swing Factors


Upside

  • 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.

Downside

  • 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 regional peers who have upgraded their fleets and services.




Mohshin Aziz Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-07-28
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 10.850 Same 10.850



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