Singapore Airlines - UOB Kay Hian 2015-11-17: Good Start To 3QFY16

Singapore Airlines - UOB Kay Hian 2015-11-19: Takeaways From Analysts’ Briefing SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Good Start To 3QFY16 

  • Aside from SilkAir, loads improved for parent airline and all subsidiaries. This is positive, given the tough operating conditions and depressed yields. 
  • Going forward, we estimate that unit cost will decline qoq due to lower fuel hedging losses and lead to higher profits, should load factors be sustained. 
  • Maintain HOLD. Target price: S$11.00. Suggested entry level: S$10.30. 



WHAT’S NEW 


• Parent airline pax load factor rose by 1.8ppt, mainly due to higher pax traffic. 

  • This is an improvement over September’s flat loads (0.0ppt), continuing the trend of improvement that started in July. The rise in October’s load factor was led by a 5.7ppt increase in loads to the South West Pacific region, which comprises about 20% of capacity. SIA also continued to rationalise capacity, with 1.8% reductions ytd. 

• Pax loads to Europe improved marginally. 

  • The load factor improvement to Europe (Oct: +0.3ppt vs Sep: -2.1ppt) suggests that SIA could have gained market share on some routes, but likely at the expense of lower yields. Even so, SIA’s exposure to Europe is substantial at 29% and hence the higher loads are operationally critical for the carrier. 
  • In addition, long-haul market America also fared well with a 1.8ppt improvement in pax loads. 

• SIA Cargo traffic grew 9.8% yoy, outpacing capacity growth, resulting in a 0.4ppt improvement in cargo loads. 

  • This does not come as a surprise as 3Q is a seasonally stronger quarter for cargo demand. 

• Subsidiary Scoot benefitted from new routes to Hangzhou, Osaka and Kaohsiung. 

  • Traffic rose 25.5%, outpacing capacity growth, which led to improved load factors (+2.8ppt). Comparatively, SilkAir’s load factor fell as its aggressive capacity expansion of 11% yoy was not completely absorbed by market demand. 



STOCK IMPACT 


• Improved loads a good start to 3Q. 

  • The higher loads for parent airline and subsidiaries are positive given fierce competition and depressed yields. Assuming pax loads and yields approximate that of 2QFY16, SIA should have been profitable in October. 
  • Going forward, pax yields are likely to be higher qoq due to a seasonally strong 3Q. Moreover, lower hedging losses should also lead to lower opex for the carrier. 
  • On balance, we believe that SIA should show increased profitability in the upcoming quarter should high load factors be sustained. We also do not expect a significant impact to earnings from the recent attacks in Paris. France accounts for about 3% of capacity but we do not expect significant demand destruction. 

• JV and partnership with Lufthansa a strategic move. 

  • The JV and partnership announced on 11 Nov involves cooperation and codesharing for key markets in Europe, Southeast Asia and Australia. This would enable SIA to expand its geographical reach into Europe via Lufthansa’s network in Frankfurt, Munich and Zurich. 
  • With the expanded network, SIA could position itself to compete with the Middle Eastern carriers and potentially establish new routes with higher yields. 



EARNINGS REVISION/RISK 

  • No change to our earnings estimates. 



VALUATION/RECOMMENDATION 

  • Maintain HOLD and S$11.00 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 

  • Greater-than-expected pax yields and lower fuel costs.



K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-17
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.00 Same 11.00

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