Singapore Airlines - UOB Kay Hian 2015-11-09: Takeaways From Analysts’ Briefing

SIA SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Takeaways From Analysts’ Briefing

All eyes were on Tigerair, however, the issue very much remains on yields and fuel hedges.
Pax yields declined to an all-time low in August but showed improvement in September.
Meanwhile, SIA recognised S$569m in hedging losses in 1HFY16.
With older fuel hedges rolling off, we believe fuel hedging losses could halve, resulting in improved profitability.
Maintain HOLD but raise our target price to S$11.00. Preferred entry price: S$10.30.

Conditional offer of S$0.41 per share for Tigerair is a 390% premium to Tigerair’s NAV as at end-Sep 15. SIA’s cost to acquire the remaining shares of Tigerair will amount to S$453m, excluding the offer for outstanding PCCS.
From a financial perspective, we see little merit to the offer, given that SIA:
1. already has effective control of Tigerair, and
2. has about S$12.8b of capital commitments on its own and its cash holdings is S$4.9b, thus effectively an inefficient utilisation of resources.

Pax yield fell 4.6% yoy, within expectations. Yields declined the most in August, and showed sequential improvement in September. The crux of the issue is to what extent yields can stabilise in the coming months. In 2HFY15, pax yields were relatively firm. On balance, we believe yields will decline by at least 5% in 2HFY16.

Scoot’s losses had declined by 90% as overall operating costs declined sharply from greater fuel efficiency. SilkAir meanwhile benefitted from lower unit costs and higher yields.

While we believe some of the aggressive price discounts are likely to end, given stability in fuel prices, we believe SIA’s ticket prices are still at a substantial premium to competitors. If economic environment continues to weaken, SIA’s ability to maintain yields will be further impacted even if fuel prices stabilise.
2QFY16’s improved earnings were also a reflection of higher load factors. We are unsure as to what extent SIA will be able to improve its utilisation. August’s load factor for example was flat yoy, compared to July’s and August’s 2.7ppt increase.

SIA recognised S$569m in fuel hedging losses in 1HFY16. In 2H15, we believe this quantum will drop as existing fuel hedges are lower. For instance, SIA has hedged 50.7% of its 2HFY16 fuel requirements at US$93/bbl vs 55.4% hedged at US$104/bbl. Thus, if fuel prices remain unchanged from 2QFY16’s average, fuel hedging losses should be lowered by US$11/bbl and lead to an almost S$300m drop in fuel hedging losses hoh.

We raise our FY16 net profit forecast by 133%, factoring in:
1. S$88m in incremental dividends, and
2. lower fuel hedging losses following SIA’s latest guidance on the quantum of fuel hedged.
We also raise our FY17 net profit estimates by 90% after lowering our average jet fuel assumption from US$88/bbl to US$80/bbl.

On balance, we see no reason for SIA to trade above book value.
We believe our valuation is aggressive as we value the core airline business at 0.8x P/B despite ROE of under 5%.
While ROE could be enhanced by increasing dividend payout, SIA’s capex commitments of S$12.8b over the next three years could limit dividend payouts.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-09

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.00 Up 10.70