UOB Kay Hian 2015-08-03: Singapore Airlines (SIA) - Takeaways From Analyst Briefing on 1Q16 Results. Maintain SELL.

Takeaways From Analyst Briefing 


  • There is very little reason to be bullish over the next 2 months as yields are likely to continue declining due to increased competition from airlines, which do not have fuel hedges. 
  • Some of SIA’s pricing pressure could however erode if fuel prices rise. That aside, we see little upside over the near term. 
  • A drop towards S$10.00 or 0.73x P/B is not unforeseeable, but that could attract value investors. 
  • Maintain SELL. 


 Little to cheer as management continued to warn on weak yields. 

  • The above chart highlights the downward trend in pax yields since the start of the April. 
  • This contrasts with that of the previous two quarters, which saw a steady increase. 
  • SIA attributed the decrease to weakness in long haul yields, especially to/from Europe. 
  • SIA attributed this to aggressive capacity additions by the Middle Eastern carriers, a view which has also been outlined over the past two weeks. 
  • Note that historically, yields declined into August and as such, unless loads improve, parent airline operations could be in the red. 

 Decline in yields could be a function of lower fuel prices and competitive positioning by airlines with little hedges. 

  • Given that the Middle Eastern carriers do not hedge fuel, they could have a pricing advantage over carriers with higher fuel hedges. This could be a key reason behind SIA’s erosion in yield. 
  • However, SIA highlighted that most regions saw lower pax yields in the quarter, partly reflecting aggressive discounting to gain market share. 
  • The odds of this continuing is highly likely. 

 Expecting progressively lower fuel cost as SIA had increased its hedges. 

  • For the rest of the financial year, SIA has hedged about 50% of its jet fuel requirements at about US$100/bbl. 


STOCK IMPACT 


 Crux of the matter is that SIA has not benefitted from lower fuel prices due to competitive positioning. 

  • Market is clearly disappointed with this and this realisation is the primary cause of the sell down. 
  • While SIA is cash rich, it still has substantial capital commitments and operating lease commitments. 
  • As such, there is the possibility that the stock could decline below our target price towards -1SD to long-term mean P/B. 

 SIAEC unlikely to be divested via in-specie dividend or outright sales. 

  • SIA indicated this in response to a query of potential divestment of its engineering arm, given structural challenges at the unit and hangar overcapacity in the region. 
  • We had long outlined the view that SIA Engineering (SIAEC) was strategic to SIA’s operations and that a divestment would not make commercial sense. 


EARNINGS REVISION/RISK 


 We have not revised our earnings. 

  • The key risk is lower yields. Every 0.1 S cent decline in pax yields from our base assumption will lower PBT by S$91m or 24.5%. 


VALUATION/RECOMMENDATION 


 Maintain SELL. 

  • We have valued SIA at 0.80x forward P/B. At this level, non-cash assets will be valued at 0.7x. (target price: S$10.70)
  • If we price SIA at -1SD to the long-term mean or 0.73x FY16 book, ex-SIAEC, this would lead to a fair price of S$10.00. 
  • However at that level, non-cash assets, will be valued at just 0.55x, which would be attractive from a value perspective. 


SHARE PRICE CATALYST 


  • Lower fuel hedges.

Analyst: K Ajith

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


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