CIMB Research 2015-07-30: Singapore Airlines - Look to 2H16 for better earnings. Maintain ADD.

Look to 2H16 for better earnings 

  • SIA fell into a core net loss of S$25m during 1QFY16, its first quarterly loss since 2009, underperforming our full-year profit forecast of S$721m, on yield weakness at SIA mainline and SIA Cargo due to strong competition to US and Europe and weak global trade growth. 
  • We maintain Add as we expect SIA to post better results in the 2H after it uses up most of its expensive legacy fuel hedges in the 1H. 
  • Medium-term catalysts include the introduction of premium economy from August, and cabin retrofits on the 777-300ERs that should improve the yield mix, and fleet replacements that should lower unit operating costs. 
  • We cut our EPS forecasts 8-26% on lower yield assumptions, and cut our target price to S$12.97 (from S$13.05), still based on 1.1x CY15 P/BV (average since 2001). 

Highlights of 1QFY16 

  • SIA reported a net profit of S$91m, but this included S$110m in compensation from Airbus for agreeing to give up seven slots out of its 70-strong A350 order, without which SIA would have suffered a core net loss of S$25m. 
  • This is SIA’s first quarterly core loss since 2009, and the unpleasant surprise was due to a 1.8% yoy yield decline at SIA mainline after two consecutive quarters of yield improvement, and an acceleration of the cargo yield decline to 7.6%. 
  • Weak trade volumes to Europe and the US likely hit passenger and cargo demand and exacerbated the competition and oversupply. 
  • While SilkAir did better than last year, and SIA Cargo and Scoot narrowed their losses, these did not compensate sufficiently for the drop in SIA mainline’s earnings. 

Where’s the hope? 

  • While revenue metrics will likely remain under pressure for the rest of the year, we highlight that SIA did not enjoy the full benefits of the low oil price during the 1Q, as 58.5% was hedged at US$110/bbl of jet. 
  • As a result, we estimate that SIA’s post-hedging fuel price fell only 20% yoy to US$96/bbl during 1Q16, against a 37.4% yoy drop in the spot price of jet to US$73/bbl. 
  • For the 2Q, SIA will remain highly hedged at 55.4% of consumption at US$104/bbl, but for 2H15, SIA will only be 32% hedged at around the same price. 
  • Buying opportunity could emerge SIA’s share price could see pressure today, but anything below S$10.60 would be a good entry point, as SIA usually finds support at 0.9x P/BV, or 1 s.d. below the average P/BV mean since 2001 of 1.1x.

(Raymond YAP, CFA)