Singapore Airlines SIA - UOB Kay Hian 2015-12-16: Strong Sequential Improvement In SIA’s And Scoot’s Load Factors

Singapore Airlines SIA - UOB Kay Hian 2015-12-16: Strong Sequential Improvement In SIA’s And Scoot’s Load Factors SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Strong Sequential Improvement In SIA’s And Scoot’s Load Factors 

  • We are impressed with SIA’s sequential improvement in pax load factor, which we believe is due to strategic codeshares. 
  • Unless yields deteriorate further, we believe 3Q’s earnings could surprise to the upside, especially with Scoot’s strong traffic growth. 
  • Going into FY17, we believe that SIA’s fuel hedges will drop sharply and lead to substantial profit growth. 
  • We roll forward our valuation to FY17’s equity base and value SIA at 0.85x book value vs 0.8x previously. 
  • Maintain HOLD. Target price S$12.00. Suggested entry level: S$10.80. 


 Fifth sequential improvement in load factor. 

  • Parent SIA’s pax load factor improved 3.1ppt in November, with stronger loads across all regions. The greatest load factor improvement was in long-haul routes, to West Asia, Africa, Southwest Pacific, Europe and the US. SIA attributed this to selective capacity adjustments and promotional activities. 
  • Pax loads for Oct 15 and Nov 15 averaged 79%, a 3ppt yoy increase. 

 Whopping 47% traffic growth for Scoot with load factors improving by 2.7ppt. 

  • The strong traffic growth was likely due to the addition of new routes to Osaka, Kaohsiung and Hangzhou. Scoot also added a new route to Melbourne in November. 
  • The improving traffic growth and load factor could be a game changer for Scoot. In 2QFY16, Scoot reported an operating loss of S$2.0m on load factor of 84.5%. For Oct-Nov 15, Scoot registered a pax load factor of 84.3%. This, coupled with lower fuel cost and better operating efficiency on its nine B787 Dreamliners should swing Scoot to the black in 3QFY16 and potentially in 4Q as well. 

 SIA Cargo loads reversed from two months of improvement, as cargo demand fell short of capacity expansion (+7.4% yoy). 

  • This does not come as a surprise as SIA has previously indicated they were “cautious” on cargo traffic outlook. 


 Codeshares are likely bearing fruit as load factors show the fifth consecutive month of improvement. 

  • Active capacity management and codeshares are likely to be the main reasons behind the improving load factor. Ytd, pax load factor has improved by 0.8ppt. 
  • We have previously assumed -0.2ppt decrease in load factor for FY16. 
  • Given the strength in ytd load factor, we raise our full-year load factor estimate to +0.6ppt by raising our traffic growth assumption. Every 1ppt improvement in load factor is expected to raise net profit by about S$50.0m, taking into account our base assumption of a 5.6% decline in yields for the period. 

 Fuel cost is likely to drop sharply in FY17 as SIA’s hedges unwind. 

  • In 2QFY16, SIA had hedged jet fuel at US$104/bbl and SIA had guided that 2HFY16’s jet fuel approximates US$93/bbl. 
  • We believe that SIA would have added to hedges for the period and 4QFY16’s hedges could be close to US$85/bbl. 
  • Given the trajectory of lower fuel prices, we believe that SIA’s fuel hedges for FY17 would be below US$80/bbl. 
  • We have assumed US$78/bbl for FY17. Every US$10/bbl decline in jet fuel costs will lead to an approximate S$570m increase in PBT for the group. 


 We raise our FY16 net profit estimates by 34%, as we factor in higher contribution from: 

  1. SIA Engineering’s incremental earnings of S$173m following the divestment of HAESL, and 
  2. a 0.8ppt increase in SIA’s FY16 pax load factor assumptions. 
  • We also raise our FY17 net profit estimate by 28% as we lower our jet fuel assumption for FY17 by US$4.5/bbl. 
  • We also raise our FY16 dividend estimate to 52 S cents per share (from 40 S cents), as we assume full payout of SIAEC’s divestment gains. 


 Maintain HOLD, but raise our target price to S$12.00. 

  • We have ascribed a marginally higher P/B multiple of 0.85x (previously 0.8x) to SIA- ex SIAEC and we roll over our valuation to FY17. The higher P/B multiple is justified on the basis of sequential improvement in: 
    1. pax load factor, 
    2. the fact that SIA is projected to earn over a S$1b net profit in FY17, 
    3. attractive forward dividend yield of 5.8% and the fact that SIA traded at well over 1x P/B in 2010, when earnings breached S$1b. 


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

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-16
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 12.00 Up 11.00