CIMB Securities 2015-08-02: Singapore Airlines - Lower fuel prices to offer relief. Maintain ADD.

Lower fuel prices to offer relief 

  • Predictably, SIA’s share price weakened after its 1Q results indicated that yields and loads were under pressure. 
  • But with the share price trading at close to S$10.60, which is at its support of 0.9x P/BV, or 1 s.d. below the average P/BV mean since 2001 of 1.1x, the downside is limited, and this could now be a good opportunity to accumulate. 
  • Our target is set at the P/BV mean and near-term upside catalysts include a lower price of jet fuel from 2H onwards, while medium-term catalysts include product retrofits and introduction of premium economy from Aug which should improve the yield mix, and fleet replacements that help lower unit costs. 
  • We maintain Add, but lower our FY16-18 forecasts 11-16% and reduce our target price (from S$12.97 to S$12.89) accordingly. 

What Happened 

  • At its analyst meeting, SIA highlighted that its monthly yields were showing pressures on a yoy as well as on a month-on-month basis (Figure 2), primarily on services to the US and Europe, reflecting aggressive capacity expansion by competitors. 
  • Passenger load factors also saw softness; despite SIA mainline reducing ASK capacity by 2.4% yoy during 1QFY15, RPK demand fell 4.2% yoy. 
  • Business class demand fell by more than economy class demand, leading to a negative mix effect which also weakened average yields. 
  • Services within ASEAN, and to Australia, had been less affected by yield pressures this time around, and SilkAir’s yields still managed a small 0.8% yoy increase while increasing capacity 7.2%. 
  • In contrast to SIA mainline, SilkAir’s PLF rose 0.6% pts yoy. 

What We Think 

  • The weakness in yields look likely to continue for the rest of the year and our previous SIA mainline yield forecast of 11.09 Scts/RPK for FY16 is now revised down to 10.98 Scts, down 2% from 11.20 Scts in FY15, and lower than even the 11.10 Scts achieved during FY14. 

What You Should Do 

  • There is no need to be overly pessimistic on SIA, especially at the current share price. 
  • Weak long-haul yields are a result of not just competition, but also the weak trade volume growth this year which tends to influence the level of long-haul business-related travel. 
  • We forecast a rebound in trade volumes next year that should help boost air travel demand. Also, fuel prices will finally decline more significantly for SIA in 2H to US$80/bbl, from US$94 in 1H, which could lift hoh earnings by an incremental S$365m. 
  • Not to mention that the 2H is the seasonal summer peak to Europe as well as the year-end school and Christmas holidays in Singapore.

Analyst: Raymond YAP, CFA

Source: http://research.itradecimb.com/