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/
