Singapore Airlines - CIMB Research 2015-11-06: Mainline carrier disappoints

Singapore Airlines - CIMB Research 2015-11-06: Mainline carrier disappoints SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Mainline carrier disappoints 

  • SIA’s earnings underperformed our expectations as its 1HFY16 core net profit made up just 32% of our previous full-year forecast, vs. over 40% in the past three years. 
  • The mainline SIA suffered a bigger-than-expected fall in passenger yields due to aggressive competition, while unit costs did not decline as much as anticipated. 
  • On the bright side, SilkAir, Scoot and SIA Cargo delivered substantial improvement. 
  • We maintain our Add call, and leave our earnings forecasts and target price unchanged (at average P/BV since 2001 of 1.1x) pending today’s briefing. 

Highlights of 2QFY16 (quarter ended September 2015) 

  • The SIA group delivered core net profit of S$198m in 2Q16, but this included unusually high dividends from “long-term investments”. Without this, core earnings would only have been S$107m, down 13% yoy on a like-for-like basis, despite low oil prices. 
  • For 1H16, core net profit without the dividend and without the compensation from Airbus and Boeing for delivery delays, would have been 47% lower yoy. 
  • SIA declared an interim 10 Scts DPS, up from 5 Scts last year. 

Mainline carrier earnings dropped more than expected 

  • Mainline SIA saw its core EBIT fall 28% yoy in 2Q16, and fall 43% for 1H16, excluding compensation for delivery delays. Its unit cost reduction was minimal despite jet fuel prices (inclusive of hedging losses) falling 27% yoy to US$90/bbl in 2Q16, as it saw higher maintenance and leasing costs, while the US$ appreciated 11% against the S$. 
  • Mainline SIA also lowered its yields 4.6% to compete for passengers. 
  • Finally, there was also a large, unexplained fall in ‘ancillary income’ . 

SilkAir and Scoot performed very well 

  • In contrast, SilkAir and Scoot both delivered load factor increases, stable/higher yields, and sharply lower unit costs as a result of their fleet modernisation programmes. Hence, SilkAir saw significantly higher profits, while Scoot neared breakeven. 
  • SIA’s investment in, and expansion of, these two carriers is yielding fruit as they have a bright future. 

SIA Cargo narrowed losses despite poor market conditions 

  • Surprisingly, SIA Cargo managed to narrow its losses yoy despite poor operating conditions. Cargo yields dropped almost double-digit, as lower fuel costs were entirely passed through. Poor air freight demand also caused SIA Cargo to suffer a fall in loads. 

Tiger Airways contributed losses to the group 

  • Tigerair Singapore contributed S$10m in operating losses in 2Q16. It was only consolidated from Oct 2014 (3Q15). 
  • SIA Engineering saw its profit contribution rise as it reduced expenses more quickly than the reduction in its revenue. 

Near-term outlook mixed 

  • Mainline SIA’s monthly passenger yields continued to decline at its fastest pace this year, in the data released up to Sep. At the same time, SIA’s all-in fuel cost may decline 13% from US$94/bbl in 1H16, to as low as US$82/bbl in 2H16. 
  • SIA guided that advance passenger bookings for Oct-Dec are positive, but mainly boosted by promotional activities, suggesting a mixed outlook in the near future. 
  • Separately, SilkAir and Scoot will likely continue to deliver strong improvements on a yoy basis.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2015-11-06
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