Reality check
- Management warns that market expectations are too optimistic.
- Earnings recovery solely premised on lower fuel price.
- Maintain HOLD with lower target price of SGD11.85 on softer load factor outlook.
What’s New
- Management gave a dose of reality at the analyst briefing and said “the analyst community is more optimistic than the company is”.
- Yields have fallen considerably since May especially on transpacific and European routes whilst regional short-haul routes are stable.
- Cargo yields remain lacklustre due to industry overcapacity.
- Management has also reduced aircraft induction numbers for FY18- 19 suggesting that the headwinds are structural.
What’s Our View
- SIA is struggling to nestle its space in the industry. Its business strategy to focus on premium business is at odds with the increasingly budget-centric profile of Southeast Asian passengers.
- Regional competitors have also stepped up its game and are serious contenders.
- Management is aware of these predicaments but is adamant that its strategy will set itself apart from the others.
- The results however points to the contrary: the parent airline’s route network has shrunk by 12% from the peak in 2009 and its passenger carried shrunk by 2% from the peak in 2007.
- SIA is clearly not a growth story and the investment objective is a play on the low fuel price environment and to cash in on dividends.
- We cut our FY16-18 earnings by 4.8%/6.4%/6.3% as we impute lower load factor to reflect current trends.
- Our target price has been revised down to SGD11.85 (from SGD12.40) based on 1.0x FY17 P/BV, and the stock remains a HOLD.
Analyst: Mohshin Aziz
Source: http://www.maybank-ke.com.sg/
