Aviation Singapore - UOB Kay Hian 2015-10-28: Earnings Preview For SIA, SIAEC And SATS

Aviation Singapore - UOB Kay Hian 2015-10-28: Earnings Preview For SIA, SIAEC And SATS SINGAPORE AIRLINES LTD C6L.SI  SIA ENGINEERING CO LTD S59.SI  SATS LTD S58.SI 

Aviation Singapore - Earnings Preview For SIA, SIAEC And SATS 

  • We expect SIA to report a 52% yoy rise in 2QFY16 net profit due to improved profitability at the parent airline. 
  • For SIAEC, we are expecting a 10% yoy rise in 2QFY16 operating profit due to a weak base and a likely increase in A380-related “C” checks. 
  • Meanwhile, SATS is expected to register an 18% yoy increase in 2QFY16 net profit due to improved gateway services margin and cost savings. 
  • Maintain MARKET WEIGHT. 



WHAT’S NEW 


 We expect SIA to report a 51.5% yoy and 50.5% qoq improvement in 2QFY16 net profit on 5 November. 

  • The parent airline is expected to report an operating profit of S$180.8m, driven by higher pax load and lower fuel costs but offset partially by lower pax yield. We have estimated a 4.6% yoy decline in pax yields and essentially assumed the pace of decline has continued from that in May-Jun 15. Every 0.1 S cent change from our base assumption will impact the parent airline’s operating profit and group net profit by S$25m and S$20m respectively. 
  • Meanwhile, existing fuel hedges are expected to lead to more than S$200m fuel hedging losses for the period. 
  • Overall, we expect SIA to declare an unchanged interim dividend of 5 cents/share. 

 Decline in yields is a reflection of low fuel prices. 

  • In the previous down cycle, yields only bottomed out two quarters after jet fuel prices bottomed out. A similar scenario could pan out over the next two quarters. 

 We expect SIA Engineering (SIAEC) to report a 10% yoy rise in operating profit due to a low base. 

  • SIAEC could see higher airframe revenue due to “C” checks on SIA’s A380 aircraft. We are however doubtful of a meaningful improvement in engine maintenance revenue, which declined by almost 42% in the previous quarter. 
  • We expect a 1 S cent decline in interim dividend to 5 S cents/share. 

 We estimate an 18% rise in net profit for 2QFY16. 

  • Higher unit services and unit meals are expected to lead to a small revenue growth, while lower raw material costs and licensing fees are expected to boost operating profit. On the revenue front, SATS had resumed handling Jetstar Asia’s gateway operations from Jul 15, which we believe accounted for most of the increase in unit services. 
  • On the cost front, raw material costs are likely to have declined in line with the lower commodity prices, while rebates announced by Changi Airport is likely to lead to lower opex. 
  • We estimate its interim dividend is likely to remain unchanged at 5 S cents/share. 

 2H16 earnings likely to be stronger due to contribution from Delta Airlines. 

  • TFK secured a S$325m long-term contract from Delta Airlines, which should start contributing in 2HFY16. We reckon TFK was operating close to breakeven level in previous quarters and that the Delta contract will boost operating profit. 


ESSENTIALS 


 SIA - Key focus for 2QFY16 results. 

  • The extent of yield decline and quantum of fuel hedges will be the key focus areas. If the decline in yield is less than expected due to better pricing or a weaker Singapore dollar, it will have positive ramifications for the remaining quarters. 

 SIAEC - Key focus for 2QFY16 results. 

  • SIAEC will be hosting an analyst briefing. We will seek greater clarity on the trend for third-party maintenance and engine checks. SIAEC cut interim and final dividends in FY15. 

 SATS - Key focus for 2QFY16 results. 

  • ASP for gateway services and inflight catering will be key focus areas. If yields stabilise, particularly for gateway services, that will hold scope for higher margins. We would also seek greater clarity on the increase in unit services and meals. Associate income typically accounts for 15-20% of pre-tax profit. A qoq decline could suggest that associates were impacted by lower cargo handled or translation losses. 

ASSUMPTION CHANGES 

  • No change to assumptions. 

RISKS 

  • Weaker-than-expected yields.


K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-28
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.70 Same 10.70
SELL Maintain SELL 3.00 Same 3.00
HOLD Maintain HOLD 3.90 Same 3.90


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