Singapore Airlines - DBS Research 2017-11-09: Weak Yields Remain The Key Concern

Singapore Airlines - DBS Vickers 2017-11-09: Weak Yields Remain The Key Concern SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Weak Yields Remain The Key Concern

  • Singapore Airlines (SIA)'s 1H18 profit of S$425m (+32% y-o-y) above expectations due mainly to one-off revenue items.
  • Yields continue to weaken for all passenger segments.
  • SIA remains vulnerable to fuel price volatility and price competition.
  • Maintain HOLD, TP S$10.30 (0.9x FY18F P/BV).



Maintain HOLD; yield decline has slowed but remains under pressure. 

  • While 1H18 headline net profit posted firm growth of 32% y-o-y to S$425m, passenger yields continued to weaken, with earnings receiving a boost from lower fuel hedging losses and one-off revenue items. We see core earnings prospects for SIA remaining under pressure from weak yields and higher fuel prices. 
  • We project SIA’s ROE to be between 4.5% and 5% over the next two years, which is below its cost of equity, and hence see current valuations at 0.9x FY18F P/BV as fair.


Where we differ: 

  • We have raised our FY18F and FY19F forecasts to the higher end of consensus estimates, though our FY19F assumptions include a 2% improvement in passenger yield, which could be difficult to pull off if competition remains keen.


Potential catalysts: 

  • SIA’s share price could rerate if it can demonstrate a sustained improvement in revenues either from increasing its passenger yield or growing other revenue streams and/or if it can materially lower its operating costs without affecting its product quality and revenues.
  • Business review could lead to longer-term profitability but near-term outlook remains challenging. SIA’s 3-year transformation plan could pay off in the longer term, but we remain cautious on the company's near-term earnings outlook as its flagship passenger business continues to face stiff competition and soft yields, and is also vulnerable to the threat of higher oil prices.


Valuation

  • Our S$10.30 target price is based on 0.9x FY18 P/BV, which is at c. -1SD its historical mean and reflects the sluggish outlook for SIA with projected ROEs of just 4-5% over FY18/FY19F.


Key Risks to Our View

  • Vulnerable to demand shocks and/or fuel price increase. With operating margins razor thin, SIA is vulnerable to any demand shock and/or an increase in fuel prices.



WHAT’S NEW


Earnings improve due to lower hedging losses but outlook remains challenged by competition and fuel prices 

  • SIA reported results that were above our expectations, with interim profit up by 32% y-o-y to S$425m, mainly due to significantly lower hedging losses (-S$259m) even as yields fell across all of its passenger airline segments. 
  • Revenue rose by 5.6% y-o-y to S$7.7bn, aided by higher load factors (+2.8pts at SIA, +3.2pts at Silkair and +2pts at Scoot) and higher carriage (+3.4% y-o-y at SIA, +18.2% y-o-y at Silkair and +16.9% y-o-y at Scoot) but offset by lower yields (-1.9% at SIA, -10.9% at Silkair and -1.8% at Scoot). 
  • Meanwhile, SIA Cargo saw strong growth in revenue of S$123m on higher freight carriage (+6.1%) and yield (+6.7%). Operating costs rose at a slower pace (+2.8% y-o-y) compared to the top line, due to lower hedging losses, and as a result, operating profit rose by 70% y-o-y to S$513m.
  • Results were mixed across the various segments, with profit growth at SIA Passenger (+49% y-o-y to S$411m), SIA Cargo (loss of S$45m to gain of S$32m) and SIAEC (+65% y-o-y to S$38m) offset by lower contributions from Silkair (-52% y-o-y to S$21m) and Scoot (-71% y-o-y to S$5m). Meanwhile, contributions from associates and joint ventures improved from a loss of S$59m in 1H17 to a loss of S$11m in 1H18.
  • An interim dividend of 10 Scts has been declared, vs 9 Scts last year.

One-off items helped boost profit in 1H18. 

  • While headline net profit of S$425m looks like it has improved substantially, this includes one-off items such as
    1. adjustments from the Krisflyer programme of S$115m,
    2. higher compensation for changes in aircraft delivery slots of S$58m and lower hedging fuel losses (S$259m),
    which are not sustainable. 
  • With yields continuing to be under pressure, and jet fuel prices having recently surged, we remain somewhat cautious on SIA’s near-term core earnings prospects.
  • We have raised our FY18F and FY19F net profit forecasts to S$627 and S$615m respectively, and we maintain our HOLD call, with S$10.30 TP, based on 0.9x P/BV.




Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-11-09
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 10.30 Up 10.100



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