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/