Maybank Kim Eng 2015-08-03: Singapore Airlines SIA - 1Q16 Results. Reality Check. Maintain HOLD.

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/