Singapore Airlines SIA - UOB Kay Hian 2015-11-06: 2QFY16 ~ Earnings Below Expectations But Scope For Improvement

Singapore Airlines SIA - UOB Kay Hian 2015-11-06: 2QFY16 ~ Earnings Below Expectations But Scope For Improvement SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) 2QFY16: Earnings Below Expectations But Scope For Improvement 

  • An S$88m rise in dividend income boosted bottom line, without which core earnings would have been below expectations. 
  • SIA also recognised some S$300m in fuel hedging losses during the period. 
  • Going into 2HFY16, we believe SIA’s fuel and non-fuel costs will decline and aid profitability. 
  • We will provide further updates pending an analyst meeting. 
  • Maintain HOLD. Target price: S$10.70. Entry price: S$10.30. 


RESULTS 


• Headline numbers boosted by increase in dividend income, excluding which net profit would have been below expectations. 

  • Included in 2QFY16 results was an S$91.1m gain (previously S$3.0m) from long-term investments, without which PBT would have been 17% below our estimate. The differential also led to net profit coming in 9% and 20% below our and consensus’ expectations respectively. 
  • SIA continued to receive compensation of S$10.7m from aircraft delivery slots but this was substantially lower than the S$110.1m in 1QFY16. SIA declared a higher interim dividend of 10 cents (2QFY15: 5 cents). 
  • Book value increased 2% yoy for the quarter. 

• Parent airline disappointed with a 29% fall in operating profit due to higher-than-expected costs. 

  • Unit cost fell by lesser than our estimate of a 6% decline, mainly due to higher maintenance costs, aircraft rental costs and handling charges which offset fuel cost savings. 

• Negative free cash flow of S$59.4m vs a positive S$731.2m in 2QFY15. 

  • This was due to a steep reduction in proceeds from aircraft sales in the current quarter, but operating cash flow rose 24% yoy. 

• Overall, fuel cost fell 15% yoy but this included fuel hedging losses of S$306.6m. 

  • In 2QFY16, SIA hedged 55.4% of its fuel requirements at US$104/bbl. Into-plane fuel cost however averaged US$67/bbl. The differential along with MTM losses led to the steep hedging losses. The cumulative hedging losses amounted to S$569m in 1HFY16. 
  • For 2HFY16, SIA guided it had hedged 50.7% of its fuel requirements at US$93/bbl. 


STOCK IMPACT 


• 2QFY16 net profit would have been better were it not for a S$161m (+7%) increase in non-fuel unit cost. 

  • Some S$50m of the increase was from higher maintenance cost (+32.1% yoy), which SIA attributed to retrofitting premium economy seats. Aircraft rentals also rose by S$55m (+29.9% yoy) presumably due to higher aircraft leases. Going forward, we believe maintenance costs will normalise. 

• All things constant, we believe fuel hedging losses will at least halve in 2HFY16. 

  • This is due to fuel hedges at lower levels, which on its own will provide much of the likely hoh improvement in earnings. We have yet to include that in our net profit estimates. 

• Weak pax yields indicative of the challenging operating environment. 

  • While the fall in pax yields was within our expectations, SIA has also indicated that weaker bellyhold and other incidental revenue also contributed to lower revenue. SIA continues to guide on weak yields and cautions on both passenger and cargo traffic. 


EARNINGS REVISION/RISK 

  • No change to our net profit estimates, pending an analyst briefing today. 


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$10.30. 


SHARE PRICE CATALYST 

  • Higher-than-expected pax and cargo yields.


K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-06
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.70 Same 10.70


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