SIA
SINGAPORE AIRLINES LTD
C6L.SI
Singapore Airlines (SIA SP) - Improved Pax Loads Across Parent SIA And All Subsidiaries
- Pax load factors improved across parent SIA and all subsidiaries in December, which is positive.
- We are encouraged by SIA’s and Scoot’s sustained high loads which, along with lower fuel costs, should lead to higher profitability for 3QFY16.
- Going forward, we believe that the sharp decline in fuel costs, combined with Scoot’s improved operational performance, should drive FY17’s earnings growth.
- Maintain BUY. Target price S$14.00.
WHAT’S NEW
Parent SIA’s pax load improvement continued in December, with 3QFY16’s rising by 1.7ppt.
- In December, SIA recorded pax load factor improvement of 0.3ppt. The strongest load factor improvement was in the West Asia and Africa regions. This was partially offset by a decline in loads to Europe, which SIA attributed to softer passenger demand, particularly France.
- We reckon this is likely due to the terrorist attacks in France. SIA also indicated that this is a “short-term dip”, suggesting signs of recovery in demand to Europe.
- Overall, 3Q’s strong loads are encouraging and suggest that SIA’s efforts to improve operations to boost utilisation are bearing fruit.
Scoot’s 3QFY16 load factors grew 1.8ppt.
- The improvement was mainly due to strong demand during the quarter. Also, Scoot’s traffic grew by 22% ytd, resulting in a 2.6ppt load factor improvement even with rapid capacity expansion.
- Meanwhile, SilkAir’s pax loads rose 0.1ppt in December, but registered a 0.6ppt decline in 3QFY16 loads due to weaker loads in October.
SIA Cargo loads were flat yoy in 3QFY16, but improved 0.5ppt in December.
- This comes despite SIA’s “cautious” cargo traffic outlook. SIA indicated this was due to additional ad-hoc charters and cargo loads were generally weak except in the Southwest Pacific region.
- We note that SIA’s 3QFY16 cargo loads were stronger than 2QFY16’s 60.3%.
STOCK IMPACT
• December marks SIA’s sixth consecutive month of load factor improvement.
- We expect 3QFY16’s substantial 1.7ppt load factor improvement to 80.0% to boost 3Q’s earnings.
- In 3QFY15, parent airline SIA recorded S$87m in operating profit on pax loads of 78.3% and pax yields of 11.5 S cents.
- We have assumed an 8% yoy decline in 2HFY16 pax yields (2QFY16: -4.6% yoy). Every 0.1 S cent rise in pax yield is expected to raise 2HFY16 and FY17 net profit by about S$46m and S$92.5m respectively.
- Coupled with lower fuel costs, this should lead to improved profitability for SIA.
• Scoot should reverse to profitability on:
- higher loads,
- lower fuel costs, and
- higher operating efficiency on its new B787s.
- In 2QFY16, Scoot reported an operating loss of S$2m on load factor of 84.5%. Comparatively, Scoot delivered pax load factors of 86.0% in 3QFY16. Furthermore, Scoot’s pax yields have been relatively firm and in fact improved by 1.9% in 1HFY16. Thus, Scoot is likely to swing to profitability in 3QFY16 on higher loads, as well as cost savings from fuel and its fleet replacement programme.
EARNINGS REVISION/RISK
- No change to our earnings estimates.
VALUATION/RECOMMENDATION
• Maintain BUY, with a target price of S$14.00.
- We continue to value SIA at 1.0x FY17F SIA ex-SIAEC book value. We expect SIA’s earnings to be boosted by lower fuel costs and about a S$950m reduction in fuel hedging losses in FY17, leading to record FY17 net profits of S$1.5b, the highest in eight years. Every US$10/bbl decline in fuel cost is expected to lead to a S$517m rise in net profits.
- We believe that P/B valuations should rise to at least 1x, given:
- expected SIA ex-SIAEC’s FY17 ROE of 11% above its cost of equity,
- potentially stabilising yields, and
- the fact that the stock traded at 1.2x P/B in 2010 when earnings breached S$1b.
- We re-iterate BUY, with a target price of S$14.00.
SHARE PRICE CATALYST
- Greater-than-expected pax yields and lower fuel costs.
K Ajith
UOB Kay Hian
|
Sophie Leong
UOB Kay Hian
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http://research.uobkayhian.com/
2016-01-13
UOB Kay Hian
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