Singapore Airlines - UOB Kay Hian 2015-10-16: Weak September Loads, But Still A Qoq Improvement

Singapore Airlines - UOB Kay Hian 2015-10-16: Weak September Loads, But Still A Qoq Improvement SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Weak September Loads, But Still A Qoq Improvement 

  • Despite flat performance for September, overall pax loads for 2QFY16 have improved, supported by both capacity reductions and traffic growth. 
  • Parent airline SIA is expected to be in the black for the quarter, unless pax yields decline by more than 9% (1QFY15 -2%). SIA is expected to release its interim results on 5 Nov 15 and we will provide an earnings preview shortly. 
  • Maintain HOLD. Target price: S$10.70. Entry price: S$9.60. 

WHAT’S NEW 

  • SIA’s 2QFY16 load factors improved 1.8ppt; pace of improvement tapers off in Sep 15. The improvement was mainly aided by capacity reductions (-1.6%). Overall, 2QFY16’s pax traffic was flat yoy, with September reversing the preceding months’ upward trend. This lacklustre traffic growth comes despite promotional activities and the summer travel demand. 
  • Pax loads to key markets Europe and US reversed from two consecutive months of gains to a decline in September. The 2.1ppt and 1.4ppt decline in loads to Europe and the US in Sep 15 could be due to recent capacity additions by Qatar at Changi. 
  • Improved load factor likely to lead SIA into black in 2QFY16. In the previous period, SIA’s parent operations was S$2m in the red, excluding S$110m in slot compensation. In the current period, SIA’s pax load factor is 7.4ppt higher qoq. Thus, unless SIA’s pax yield declines by more than 9% qoq, the parent airline is likely to be profitable in the current quarter. 
  • Cargo traffic improved in Sep 15 with stronger loads to the South West Pacific market (+9.0%), but expected to continue to post a loss in 2QFY16. Cargo loads improved to South West Pacific, Asia and Africa, despite a decline to the Europe and US markets. The stronger loads are likely to be IT-related shipments, such as iPhones and electronic gadgets. However, we reckon the improvement comes on the back of reduced cargo yields. With cargo load factors still 0.8ppt lower than in 1QFY16 (61.1%), we expect cargo operations to continue to be in the red. 


STOCK IMPACT 


 Improved load factor is the key positive. 

  • 2Q is a seasonally stronger period compared with 1Q and thus improved profitability should not come as a surprise. Still, we expect yields to continue to decline yoy and qoq for 2QFY16 due to promotional activities and changing macro landscape. As of Sep 15, SIA has guided that “promotional activities will continue in relevant markets”. 

 Front-end yields could be negatively impacted by weakness in the financial sector and job cuts in the Oil & Gas industry. 

  • Premium traffic is an integral part of SIA’s business, accounting for more than one-third of revenue historically. We believe that front-end ticket pricing would have been lowered for 2QFY16, in view of cyclical weakness in the financial and O&G sectors. 

 Resumption of non-stop flights to US a strategic move. 

  • The flights would commence in 2018 with the more fuel efficient A350-900ULR. SIA previously operated flights to the US on A340s that were too costly, exiting in late-13. We view this as a strategic move to: a) tap on the North American long-haul market which has fewer competitors and no Gulf presence, and b) lower the risk of customers switching to other carriers that operate services to the US. 

EARNINGS REVISION/RISK 

  • There is no change to our FY16 net profit estimates. 

VALUATION/RECOMMENDATION 

  • Maintain HOLD and S$10.70 target price. 
  • We continue to value SIA’s core business at 0.80x book value, ex-SIAEC. Suggested entry price is S$9.60. 

SHARE PRICE CATALYST 

  • Lower fuel hedges. 
  • Strengthening US dollar against the Singapore dollar.


K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.70 Same 10.70


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