Singapore Airlines (SIA SP) - UOB Kay Hian 2017-08-01: Analyst Briefing Takeaways ~ Recovery In Pax Yields Remains Uncertain

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-08-01: Analyst Briefing Takeaways: Recovery In Pax Yields Remains Uncertain SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Analyst Briefing Takeaways: Recovery In Pax Yields Remains Uncertain

  • The lower decline in 1QFY18 pax yield appears to be supported by positive forex movements, which offset lower base yields. 
  • SIA is less negative on yield but did not guide for an improvement. This will not impact our estimates as our numbers have factored in a 0.6% rise for FY18 and 1.4% for the remainder of the year. 
  • We raise our FY18 core earnings estimate by S$79m as we factor in stronger loads, and raise our target price by 1% to S$10.10. 
  • Maintain HOLD. Entry price: S$9.10.



ANALYST BRIEFING TAKEAWAYS


Neutral on pax yields but we raise our load factor assumption for FY18. 

  • Singapore Airlines (SIA) guided that 1QFY18's lower rate of yield decline was aided by positive forex movements, which offset the decline in base yields. Pax yields were flat mom from April to June, diverging from previous trend of mom declines. 
  • While SIA did not commit on the direction of yields, the carrier indicated it was "less negative" but remains cautious over the medium term. 
  • We are neutral on SIA’s direction on yields as we have assumed a marginal 0.6% rise in yields for FY18.

Sustainability of cargo yield recovery is uncertain. 

  • SIA benefitted from the air freight industry's stronger cargo demand and higher cargo yields, but guided there is still too much excess capacity in the cargo market. 
  • Meanwhile, IATA also indicated that the new export component of global PMI has fallen since it peaked in Feb 17, which could be a prelude to easing air freight demand. Thus, it remains to be seen how long the improvement in cargo yields can last. 
  • We have assumed a 3.3% rise in cargo yields for FY18 (1QFY18: +4.8%), implying a 3% rise for the rest of the year.

Excluding prior year’s EI, SilkAir’s yields fell 3.7% yoy. 

  • SilkAir’s prior-year revenue included S$6m in EI ticket breakage revenue, excluding which the decline in yields would have been more muted than the headline 8.6% decline. The decline in yields was due to: 
    1. greater revenue sharing on interline flights mainly accruing to SIA as fuel surcharges were folded into base fares, and 
    2. fewer chartered flights. SIA also indicated that SilkAir was impacted by competition from low-cost carriers (LCC).
  • SIA was also affected by the removal of Changi Airport incentives, which along with group capacity expansion (+2.8% yoy) led to the 9% rise in landing, parking and handling charges. 
  • Excluding Virgin Australia’s prior-year restructuring charges, associate and JV profits would have been flat yoy. Given that SIAEC’s associate and JV income rose 2% yoy, this would suggest that Virgin Australia’s and Vistara’s losses widened yoy.


STOCK IMPACT


Yield recovery factored in but operating environment remains fluid. 

  • Unlike in previous quarters, SIA did not sacrifice yields for loads at the expense of profits in 1QFY18 but we are unsure to what extent this will continue. 
  • SIA opined that competition from Middle Eastern carriers on the kangaroo routes has not abated and that North Asian routes remain soft due to excess capacity. 
  • For FY18, we have assumed a marginal 0.6% rise in yields, which implies a 1.4% rise in yields for the rest of the year. Every 0.1 S cent decline from our base yield estimate will lower our FY18 net profit estimate by 15%. 
  • We raise our pax load assumptions as we factor in higher ytd traffic and loads and consequently raise our FY18 earnings estimate by S$79m.

Investors should also note the risk to book value from long dated Brent hedges.

  • SIA has hedged 47% of its long-term fuel requirement at US$53-59/bbl. Any sustained decline in fuel prices will lead to fair value losses in reserves. 
  • As at 1QFY18, SIA recognised S$182m in fair value losses, the bulk of which should be from fuel hedges.


EARNINGS REVISION/RISK

  • We raise our FY18 core net profit estimate by S$79m as we factor in higher traffic and loads, as well as higher landing, parking and handling charges. 
  • Our headline FY18 net profit is raised by S$252m, factoring EI of S$173m arising from the revision in Krisflyer breakage rates and EI slot compensation.


VALUATION/RECOMMENDATION

  • We raise our target price slightly from S$10.00 to S$10.10, following our revised earnings estimates. 
  • We have also assumed fair value hedging losses for FY18, arising from markto-market changes in fuel hedges. Given that SIA has long-dated fuel hedges until 2023, a decline in fuel prices remains a key risk.


SHARE PRICE CATALYST

  • Capacity cuts across the industry and higher yields.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-01
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.10 Up 10.000



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