Singapore Airlines - Maybank Kim Eng 2015-10-26: 2QFY16 ~ D/G to HOLD, lacks catalyst

Singapore Airlines - Maybank Kim Eng 2015-10-26: 2QFY16 ~ D/G to HOLD, lacks catalyst SIA SINGAPORE AIRLINES LTD C6L.SI 

2QFY16: D/G to HOLD, lacks catalyst 

  • 2QFY16 results on 5 Nov. Expect core net PATAMI of SGD169m (+197% YoY, +85% QoQ). 
  • Cut FY16-18 EPS by 9-11% after imputing revised lower traffic growth & the latest jet-fuel & USD/SGD assumptions. 
  • Downgrade to HOLD from BUY due to limited upside and no immediate catalyst. TP marginally lowered to SGD11.80. 

What’s New 

  • We downgrade the share in light of persistent soft yield environment and management’s plans to taper down future growth capacity plans. Otherwise, 2QFY16 operating statistics were in line with our expectations. 
  • System traffic growth rose 11.2% YoY and load factor, 1.9ppt YoY to 70.8%. This was its highest load factor since 2002. 

What’s Our View 

  • Load factor is impressive, but this came at the expense of lower yields as competitors cut prices to gain market share and loads. SIA has to reciprocate by dropping its fares but is saddled with expensive fuel hedges: 55% of its fuel in 2QFY16 had been fixed at USD104/bbl vs an average market price of USD66/bbl. 
  • We cut FY16-18 EPS by 11.4%/8.5%/10.5% after filtering revenue generated from aircraft slot trades which we deem non-recurring. 
  • We also adjust capacity-growth assumptions based on management’s inputs and our yield, jet-fuel and USD/SGD assumptions. 
  • Downgrade to HOLD from BUY with a lower TP of SGD11.80 from SGD11.85, after revising earnings. Our fair value is based on an unchanged 1.0x FY17 P/BV, its 10-year mean.

Robust operating statistics 

Passengers at a record, but cargo still languishing 

  • Group - parent airline, Silk Air, Scoot and Tigerair - passenger load factor improved 1.9ppts YoY to 83.1% in 2QFY16. This was its best quarterly load factor since it started publishing the information. Traffic growth was flat as ASK shrank 0.1% YoY. From this, we infer that this was the second year that the group’s capacity has not grown. Management says it will inject capacity growth in CY2016, supported by incoming fleet deployment. 
  • The cargo market was less buoyant as its load factor shrank 1.7ppts YoY to 60.3%. Load factor has been languishing at its 5-year low mark since Apr 2015. Cargo capacity grew 2.6% YoY in 2QFY16. Management pointed to a weak air-freight industry that is suffering from overcapacity.

Europe and Australasia routes are standouts 

  • Almost all the geographical segments exhibited an exceptional Jul-Aug 2015 before easing in Sep 2015. We are not concerned by the drop in Sep 2015 load factors as it coincided with flight frequency addition. The standouts are the Australasia and European sectors, which are achieving above 90% load factors. This momentum should continue into 2HFY16 and deliver even better YoY comparisons as 2HFY15 was saddled by specific challenges on the Southeast and North Asian routes. 

Earnings revisions 

FY16 forecast: lower fuel price and lower capacity 

  • Firstly, we filter the SGD110m compensation received in 1QFY16 for the release of seven aircraft delivery slots meant for FY18-19 as we deem this as non-recurring income ― this information was only revealed during the 1QFY16 analyst briefing. We use management’s latest guidance on capacity deployment, which will shrink marginally. 
  • Overall yields have been tweaked lower to reflect current industry trends. Our fuel-price assumptions have taken into account SIA’s latest fuel hedges. Based on these assumptions, we forecast a core net PATAMI of SGD650.3m (+314% YoY). This is 11.4% lower than our previous estimate of SGD734.3m. 
  • The SGD has weakened against the USD and this has caused many USD-denominated costs to rise in SGD terms. 

FY17F: lower fuel price and yields 

  • Again we use management’s latest guidance on capacity growth and use our latest house USD/SGD forex rate. We taper down our yield assumption to reflect the current weak yield environment. Our fuel-price assumptions have taken into account SIA’s latest fuel hedges. Based on these assumptions, we forecast a core net PATAMI of SGD808.1m (+24.3% YoY). This is 8.5% lower than our previous estimate of SGD828.1m. 

FY18F: high fleet deployment to accelerate traffic growth 

  • We use management’s latest guidance on fleet deployment to ascertain capacity growth. We expect the high number of aircraft deployment to accelerate traffic growth to 5.0%. We assume an average jet fuel price of USD100/bbl, and this will be adjusted as necessary. Based on these assumptions, we forecast a core net PATAMI of SGD879.8m (+8.9% YoY). This is 10.5% lower than our previous estimate of SGD983.3m.


Fair value of SGD11.80 (7% upside potential) 

  • Our revised target price is SGD11.80, down marginally from SGD11.85, on the back of the downward earnings revisions. 
  • Our revised TP is still pegged to 1x FY17 P/BV, which is close to its long-term mean of 0.98x. This should be a good floor-price indicator for the airline as the company will produce healthy earnings and strong balance sheet.

Downgrade to HOLD on limited upside 

  • The stock price has re-rated since our upgrade on 18 Aug. As there is limited upside potential to our fair value estimate, downgrade to HOLD from BUY. 

Other developments 

SIA to re-start non-stop Singapore to US service in 2018 

  • SIA plans to re-launch the world’s longest non-stop flight from Singapore to New York, and Singapore to Los Angeles as well as other points in the US by 2018. SIA will utilize the latest generation Airbus A350-900 ultra-long-haul (ULH) aircraft that is capable of flying up to 8,700nm. SIA previously had daily services to New York and Los Angeles, which were exceptionally popular among customers but it was discontinued in 2013 as it was unfeasible due to high fuel prices. SIA is sanguine that the new generation A350-900 ULH has superior cost economics and ensures profitable operations. 
  • We are neutral on this announcement as it is many years away and have no financial implication in the short term. 

Scoot to take over Jeddah services from SIA 

  • Scoot will operate the Singapore to Jeddah (Saudi Arabia) services from 1 May 2016, effectively taking the route over from SIA. This is to optimize the landing slots as Scoot’s Boeing 787-8 aircraft has 335 seats as opposed to SIA’s Airbus A330-300’s 285 seats (+17.5% more seats). Moreover, the route caters specifically to religious pilgrims whom sole focus is for lower cost of travel rather than premium services. 
  • This is a wise decision by management to right-fit the product profile to passenger demand. However, there is brand-equity erosion on the part of SAI as this route is a major void in the airline’s ambition to become a globally connected player. Jeddah is a key aviation destination with over 70 airlines servicing the route and direct global connectivity to more than 200 destinations. 
  • All things considered, we believe the commercial decision by management to replace SIA flight with Scoot is the best trade off. 

Scoot and Tigerair to jointly operate SIN-Guangzhou route 

  • Scoot and Tigerair (56%-owned subsidiary; Not Rated) will expand their cooperation and jointly manage the Singapore to Guangzhou (China) route. Both airlines will operate twice-daily services, and this is envisaged to better match capacity to demand. 
  • This tie-up reinforces our view that Tigerair will eventually be taken private by the Group. We believe there will be further co-operation and tie-ups as it is inevitable to behave as part of the Group. Therefore, it would be much easier on the Group to privatise Tigerair to absolve itself from making countless regulatory announcements and due considerations. 

Mohshin Aziz Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-26
Maybank Kim Eng SGX Stock Analyst Report HOLD Downgrade BUY 11.80 Down 11.85