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.

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.

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.

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

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.

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.

SIA Engineering’s incremental earnings of S$173m following the divestment of HAESL, and
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.

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.

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