Singapore Airlines SIA - UOB Kay Hian 2016-01-18: Improved Pax Loads Across Parent SIA And All Subsidiaries

Singapore Airlines SIA - UOB Kay Hian 2016-01-18: Fuel Shock? SIA Is The Best Proxy Play; Upgrade To BUY 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: 

  1. higher loads, 
  2. lower fuel costs, and 
  3. 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: 
    1. expected SIA ex-SIAEC’s FY17 ROE of 11% above its cost of equity, 
    2. potentially stabilising yields, and 
    3. 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 | http://research.uobkayhian.com/ 2016-01-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.00 Same 14.00


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