UOB KayHian Research 2015-07-30: Singapore Airlines - Disappointing Earnings As Yields Fall To Multi-year Lows. Downgrade to SELL.

1QFY16: Disappointing Earnings As Yields Fall To Multi-year Lows 


  • Were it not for a S$110m gain from slot compensation, SIA would have been in the red. 
  • The disappointing earnings came as yields fell to a 7-year low. 
  • SIA’s continued guidance of weak yields and further fuel hedging losses lead us to slash our full year net profit estimate by 61%. 
  • Downgrade to SELL and lower our target price by 8%. 



RESULTS 


• Headline numbers in line with consensus and above our estimate of S$48m but…. 

  • Included in 1QFY16 results was a S$110m compensation for aircraft delivery slots. 
  • SIA had not guided for this and excluding this, earnings would have been way below estimates and in the red. 

• …pax yields fall to the lowest level in seven years; warns of further weakness. 

  • Parent airline’s yield fell 1.8% yoy to 10.70 cents. 
  • Singapore Airlines (SIA) noted the erosion in yields was due to “significant capacity injection and aggressive fares from competitors, particularly on Americas and Europe routes “. 
  • We also believe that a weak A$ and rupiah could also have contributed to the weakness. 
  • SIA warned that the decline in yields is likely to persist. 

• Into-plane fuel costs fell 33% yoy but fuel hedging losses of S$263m offset most of the gains. 

  • The fuel hedging loss was due to SIA hedging jet fuel at US$110/bbl during the quarter. 
  • As a result, net fuel cost declined 13.3% yoy. Ex-fuel cost was mostly flat. 
  • For 2QFY16, SIA had hedged 55% of its fuel requirements at US$104/bbl. 
  • Given that jet fuel is trading at US$62-70/bbl since the start of July, we believe SIA will recognise at least S$200m in hedging loss in 2QFY16. 


STOCK IMPACT 


• Guidance for weak demand for the Americas and Europe routes. 

  • While not totally surprised, SIA’s specific guidance does not add to confidence and suggests weak demand for all classes. 
  • This will impact yields going forward. SIA also warned that yields are likely to remain weak. 

• Not optimistic of a cargo upturn. 

  • SIA warned that air cargo yields are “unlikely to see an upturn as industry overcapacity persists.” 

• Premium economy class to be launched in August. 

  • We do not expect this to alter the tide of lower yields as premium economy cabins amount to only about 4% of total fleet when fully launched. 


EARNINGS REVISION/RISK 


• We slash our FY16 and FY17 net profit forecasts by 61% and 56% respectively as we lower our pax yield assumptions from -0.9% for FY16 to -3.5%. 
  • We also cut our FY16 dividend forecast from 50 cents/share to 22 cents/share. 


VALUATION/RECOMMENDATION 


• Downgrade to SELL. 

  • In our recent note titled Qatar Trouble, we highlighted the risk to yields as load factors continued to decline across Europe. 
  • SIA has now not only guided for weak demand out of Europe but also yields. 
  • The trend towards lower yields led us to lower our fair value P/B multiple for SIA’s core operations from 0.85x to 0.80x. 
  • Our new target price is thus reduced by 8% to S$10.70. 


SHARE PRICE CATALYST 


• None. 


(K Ajith)

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



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