Singapore Airlines - CIMB Research 2015-12-09: Don’t be too pessimistic

Singapore Airlines - CIMB Research 2015-12-09: Don’t be too pessimistic SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Don’t be too pessimistic 

  • Although SIA’s 1H16 results disappointed, investors need not be overly pessimistic, as a cyclical upturn may yet arrive and structural reforms are being implemented. 
  • European passenger weakness, and the air freight slowdown were the key cyclical drags, but it would be unusual for the weakness to last beyond the next six months. 
  • Long-term initiatives like SilkAir’s and Scoot’s expansion are bearing fruit, while the privatisation of Tiger Airways would yield even more group-wide synergies. 
  • We stay Add as we see upside surprises given the depressed share price, with our target of S$12.83 still based on P/BV of 1.1x (average since 2001). 

■ SIA mainline passenger business hit by European weakness 

  • In the past two quarters, the mainline carrier’s yield weakness was primarily due to weak European demand, which was not surprising given the continent’s especially weak business environment this year. 
  • The Australian market was strong despite the weak Australian dollar, which we attribute to capacity reductions by two Malaysian carriers. 
  • While US demand was good, North Asian competitors had added capacity which caused fare compression. 
  • Competition to Europe from Gulf carriers also added to the mix. 

■ SilkAir and Scoot were the shining stars 

  • In contrast, the intra-Asia market was stable, and SilkAir benefitted from an improved competitive standing after excessive regional LCC expansion in 2012-13 was partially reversed in 2014. 
  • Both SilkAir and Scoot saw significant 4-7% yoy unit cost reductions for 1HFY16 on the back of their 9-10% yoy ASK growth (which spread out fixed costs) and improved fleet efficiencies as their older aircraft were replaced with new ones. 

■ Tiger Airways privatisation is an important strategic move 

  • We view SIA’s move to privatise Tiger as being very beneficial against the small cost of doing so, particularly as SIA reallocates traffic rights across different airlines in the group to maximise revenue potential. 
  • Already, SIA and SilkAir have announced the transfer of several less-premium destinations to Scoot to improve profits. More will follow. 

■ Other structural moves to yield dividends later 

  • SIA’s A350s which start delivery soon will improve profits on smaller European routes as they replace larger B777-300ERs. SIA’s recent order for seven ultra long-range A350s for 2018 delivery will enable it to compete for non-stop transpacific passengers and open up new direct US points. 
  • Premium economy, only introduced from August, is already seeing strong demand on the Kangaroo route, with impressive loads in the mid-80s. 
  • Its lounges and cabin products are also being refreshed to stay ahead of the competition. 

■ Cyclical factors could improve 

  • Erstwhile weak cargo demand is currently ramping up for the year-end peak season. 
  • We think European passenger demand may improve next year, as weak trading conditions cannot last forever. 
  • With SIA’s shares trading at trough levels of 0.9x P/BV (1 s.d. below mean), downside risks have been reflected and the market is ready for upside surprise.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09
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