UOB Kay Hian Research 2015-07-01: Singapore Airlines - Maintain HOLD, lower target price to S$11.60 amid increased competition from Qatar Airways


Singapore Airlines (SIA SP) Qatar Trouble 

  • SIA’s May pax load factor to Europe was the lowest in six years and came amid increased competition from Qatar Airways, which began operating the Airbus A350 aircraft out of Singapore on 11 May. 
  • By August, Qatar Airway’s total capacity out of Singapore will rise 67% and pose an even greater challenge to SIA’s biggest market - Europe. 
  • We thus cut our FY16 net profit forecast by 24% and lower target price to S$11.60
  • Maintain HOLD. Suggested entry level is S$10.30, which is -1SD on P/B. 


WHAT’S NEW 

SIA’s load factors to Europe fell for two consecutive months, with Europe showing the largest yoy decline. 

  • Singapore Airlines’ (SIA) overall pax load factor fell 1.3ppt in 2MFY16 (Mar-Apr 15), with pax load factor to Europe declining by an average of 5.6ppt. 
  • Europe accounts for 28% of SIA’s (parent airline) capacity and is also a key market for business travels. The decline in Europe’s load factor could be due to Qatar Airways’ introduction of the new Airbus A350 aircraft on 11 May. Qatar Airways is also increasing its flight frequency to Doha to thrice weekly, from twice weekly, by August. 
  • According to the Centre for Asia Pacific Aviation, this will result in a 67% rise in Qatar Airways’ capacity out of Singapore. 
  • For SIA, this will lead to increased competition on Europe and North America routes as the Middle East is an important connecting point to these regions. 

Cut our FY16 net profit forecast by 24% as we lower pax load factor assumption by 1.2ppt and yields by 1%. 

  • We lower SIA’s pax load factor assumption for FY16 from 78.9% to 77.7%. 
  • We estimate every 1ppt change in load factor will shave about S$150m at operating level for FY16. 

Qatar Airways likely gunning for a share of the business-class segment. 

  • Current promotional fares to five European cities are at least 30% cheaper than SIA’s. Qatar Airway’s ultimate goal appears to be a slice of SIA’s high-yielding business class as the increased capacity will add 448 weekly business-class seats to Europe, via Doha. 
  • We estimate the increase in business-class capacity will approximate 11-14% of SIA’s business-class capacity to Europe. 

STOCK IMPACT 

  • Both load factors and yields are likely to ease in the coming months. 
  • We believe the market is aware of the risk of the lower yields but may not be aware of the cause. 
  • In addition, there is a real risk of yields deteriorating in the coming months. This is likely to be reflected in SIA’s 1QFY16 results in August. 
  • Much of the optimism we had for SIA stemmed from six consecutive months of yield improvement from Sep 14 as well as the likely cost efficiencies from new deliveries. 
  • However, Qatar Airway’s latest move has raised the ante for SIA. 

EARNINGS REVISION/RISK 

  • We cut our FY16 net profit forecast by 24%. Our net profit estimate is now 5% lower than consensus. Aside from yields and load factor, the primary swing factor will be fuel prices but the impact will not be significant as SIA has already hedged 55% of fuel requirements for the year. 
  • We also lower our dividend estimate for FY16 from 50 cents to 45 cents. 

VALUATION/RECOMMENDATION 

  • Maintain HOLD but lower our target price from S$12.40 to S$11.60. 
  • We also lower our fair value P/B multiple for SIA’s core business from 0.9x to 0.85x. Core ROE ex- SIAEC is estimated at 5.1% due in part to its net cash of S$3.6b. 
  • Suggested entry level is S$10.30, which is -1SD on P/B. 

SHARE PRICE CATALYST 

  • The stock is likely to trade between -1SD and 0.9x P/B. No catalyst aside from the said trading range.

(K Ajith)

Source: http://research.uobkayhian.com/




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