Singapore Airlines - OCBC Investment 2015-11-09: Pressures on parent airline to stay

Singapore Airlines - OCBC Investment 2015-11-09: Pressures on parent airline to stay SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines: Pressures on parent airline to stay 

 Core 2QFY16 below expectations 
 Privatising Tigerair 
 Enjoying lower fuel costs; maintain HOLD 

2QFY16 reported PATMI boosted by one-off dividend income 

  • Singapore Airlines’ (SIA) 2QFY16 core PATMI missed our expectations as it formed only 21.1% of our FY16 forecasts. 
  • Excluding Tigerair, 2QFY16 revenue declined 5.8% YoY to S$3.7b, mainly due to a 7.0% decline in revenue from the parent airline as a result of a 4.6% decline in passenger yields. 
  • Cargo yield also fell 9.4% despite higher freight carriage. If not for the 15.2% YoY decline in 2QFY16 fuel costs, total operating expenses would have been higher, driven mainly by higher aircraft lease rentals, costs to retrofit cabins for premium economy product, and aircraft maintenance and overhaul costs. 
  • Consequently, 2QFY16 reported PATMI jumped 135.0% to S$213.6m, but stripping out one-off dividend income of S$91.1m, 2QFY16 core PATMI came in at S$122.5m. 
  • For 1HFY16, core PATMI rose 161.6% YoY to S$213.7m, which formed only 36.8% of our FY16 forecasts. 

Privatising Tigerair helps in unlocking synergies 

  • In our view, privatising Tigerair will benefit SIA over a longer-term horizon as it gives management flexibility and ability to accelerate the process to unlock synergies within the group to achieve cost savings and maximisation of revenue. 
  • Within SIA’s portfolio, we believe there are much more in terms of route rationalization that can be done between Scoot and Tigerair to capture interlining traffic. However, given current competitive landscape of the airline industry within the region, SIA’s traditional strategy of pursuing growth through its full service parent airline will not help. 
  • We believe pressure on passenger yields on its parent airline is likely to remain with the continued capacity expansion of the Gulf carriers, especially for the Europe routes. 

Expects fuel costs to drop further; maintain HOLD 

  • For 2HFY16, SIA is 50.7% hedged at an averaged hedged price of US$93/barrel. Management guided that the percentage hedged and average hedged price will decline with time as the more expensive hedges continue to expire. 
  • Incorporating 2QFY16 results and mixed outlook, we cut FY16F PATMI by 1.1% but raise FY17F PATMI by 4.3%. 
  • Consequently, our FV increases marginally to S$11.45 (prev: S$11.27). Maintain HOLD. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-09
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 11.45 Up 11.27