Singapore Airlines (SIA SP) - UOB Kay Hian 2018-02-14: 3QFY18 62% Rise In Net Profit Is No Small Feat And Earnings Are Above Street’s Full Year Estimates By 20%

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 3QFY18: 62% Rise In Net Profit Is No Small Feat And Earnings Are Above Street’s Full Year Estimates By 20%

While SIA's earnings were 6% lower than the two average estimates, it was nonetheless substantially higher than the street’s full-year estimates.
SIA Cargo’s profits and Scoot’s profit growth were notable surprises. The former’s profit was the highest in 10 years, while the latter’s was the highest in 5 years.

There are no revisions to our net profit estimates, and we will provide further updates post analyst briefing. Maintain BUY on SIA. Target price: S$11.90.

3QFY18 headline net profit grew by 61.5% y-o-y vs our expectations of 74% y-o-y. We believe these are an excellent set of results as 9MFY18 headline net profit exceeded consensus’ full-year estimates of S$593m by 20%. This implies that the street expects a 4Q loss, which we think is unlikely.
Parent airline’s earnings were 30% lower than our estimates as unit cost grew by a larger-than-expected quantum (3.7% y-o-y vs our estimates of 1.73% y-o-y). In addition to rising unit costs, we infer that parent operating profit was affected by lower ancillary income and higher currency exchange losses. Although parent airline yields declined by 1% y-o-y, revenue per available seat-km (RASK) grew by 2.4% y-o-y.
SIA Cargo beats expectations as yields rose by a whopping 12.1% vs our expectations of a 5.1% growth.

Scoot surprises with 48% y-o-y rise in operating profit, the highest in almost 5 years. Scoot’s operating profit grew by a whopping 2150% q-o-q as yields increased by 1.7% y-o-y.
However, Silk Air continued to underperform as yields declined by 8.6% y-o-y. SIA noted that the decline in yields occurred as a result of the 13.0% expansion in operations, which outstripped growth in revenue.
On a slightly positive note, Silk Air’s pax unit cost declined by 2.4% amidst the rising fuel prices.

Future gains are also likely as SIA has hedged approximately 40.7% of its fuel requirements for 4QFY18 at about US$65/bbl on jet fuel. The group also possesses long-dated Brent contracts till FY23 at US$53-59/bbl, and these cover up to 47% of the group’s projected fuel consumption.
In comparison, jet fuel prices are trading at an average price of US$80.5 in 2018.

However, FCF ex-working capital changes remained in the red at a negative S$683m due to higher capex, which rose 43% y-o-y during the quarter.
Meanwhile, book value rose 7.23% q-o-q to S$11.87 while equity base rose 1.2% y-o-y mainly due to improvements in fair value reserve and higher profits.

While we had expected flat yields, we believe that yields were impacted by unfavourable forex as the group recorded $19m in forex losses for the quarter. In addition, we believe that RASK should be a fairer comparison as it would exclude the anomalies of varying pax load factor.
Using RASK (revenue per available seat-km) as a reference for yield, we note that it was 2.4% higher y-o-y and was an improvement over 2QFY18’s 0.3% y-o-y decline. We believe that SIA’s efforts to “stabilise yields” have proven fruitful as yields continue to improve across the board.
Going forward, we expect yields to improve as the group continues to introduce new initiatives and technological innovations as part of its three-year transformation programme.

There are no changes to our net profit estimates, and we will revise our earnings post analyst briefing.

At current price of S$10.62, SIA’s airline business is valued at an undemanding 0.78x P/B. We continue to maintain our BUY recommendation with a target price of S$11.90.
We continue to value SIA 0.9x P/B.

K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900