Singapore Airlines - CIMB Research 2016-02-05: Congratulations Scoot, you made it!

Singapore Airlines - CIMB Research 2016-02-05: Congratulations Scoot, you made it! SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Congratulations Scoot, you made it! 

  • SIA delivered above-expectation 3Q16 results, with YTD numbers requiring us to raise our FY16 core EPS forecast by 18.5% on lower-than-expected yield declines. 
  • SIA, SilkAir, Tigerair and Scoot all benefitted lower fuel prices and higher loads which more than offset yield pressures, resulting in higher yoy profitability. 
  • Only SIA Cargo did worse than last year, due to very significant yield pressures. 
  • Maintain Add with a higher target price (S$13.00), still based on P/BV of 1.1x (avg since 2001). Catalysts include lower fuel prices, and strong execution by SilkAir and Scoot. 

Good results after earlier disappointments 

  • SIA’s 2Q16 had disappointed our expectations, but after lowering our numbers, SIA delivered 3Q results that surprised us on the upside, so we expect consensus numbers to be upgraded. 
  • While we had reflected lower fuel prices into our FY16 projections, we also factored in a low level of yields that the group passenger airlines managed to beat, i.e. we may have been too conservative in our assumption of accelerating yield declines. 
  • Lower jet fuel prices also started to have a larger beneficial impact to net earnings. 

Unit cost reductions more than offset yield declines 

  • All the group pax airlines delivered much stronger yoy profits, with Scoot reporting its maiden profit. 
  • Yields dropped across the board, due to aggressive competition and the weak economic cycle affecting SIA mainline, and due to strong capacity growth at SilkAir and Scoot that required price stimulus. 
  • But unit costs dropped even more, due to lower fuel prices and the delivery of fuel-efficient 738/787 planes, and loads were generally higher also. 
  • Only SIA Cargo reported lower earnings, but at least it was profitable too. 

Investors rather apathetic towards SIA, but… 

  • We met investors in the region last month, who were largely apathetic towards SIA. 
  • While the cheap oil story is known, investors were concerned about the degree of yield pressure that SIA mainline would face as a result of the weak global economies, and from rising competition with the Gulf carriers to Europe and with North Asian carriers to the US. 
  • Only investors who were mandated to track the FSSTI rejoiced at SIA’s continuing outperformance against the index. 

…cost savings are beginning to gain the upper hand 

  • SIA acknowledged the tough realities, guiding for continuing “pressure on loads and yields”. 
  • The poor oil industry outlook and investment bank retrenchments could impact business class travel demand in the immediate future. 
  • At the same time, SIA’s average cost of fuel hedges are falling quickly, as SIA mainly hedges jet fuel over a horizon of not more than 12 months. 
  • In the end, it is all about the tug-of-war between yields and costs, and SIA’s 3Q results suggest that cost savings are beginning to gain the upper hand. 

Don’t forget the beneficial structural changes coming up 

  • SIA’s visionary strategy of growing SilkAir and Scoot and revitalising their fleet with new aircraft will likely yield dividends for years to come. 
  • The same applies to the growing portfolio of partnerships with other airlines. 
  • SIA mainline also introduced premium economy from August, is refreshing its suite of products, while the fuel-efficient A350s will be delivered soon. Investors can rest assured that SIA is staying ahead of the game.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2016-02-05
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