Singapore Airlines SIA - UOB Kay Hian 2016-02-01: 3QFY16 Results Preview ~ Rise In Headline Profits, Even With Fuel Hedging Losses

SGinvestors.io

SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) 3QFY16 Results Preview: Rise In Headline Profits, Even With Fuel Hedging Losses 

• SIA is expected to post a strong headline 3QFY16 net profit, even with substantial fuel hedging losses. 
• We expect 3QFY16 to be the peak period for fuel hedging losses, which should progressively decline in the subsequent quarters. 
• Key numbers we would be looking out for include: 
  1. SIA’s guidance on future fuel hedges, and 
  2. the extent of pax yield erosion. 
• Maintain BUY. Target price: S$14.00. 

WHAT'S NEWS 

• Headline net profit expected to rise 88% if SIA recognises the reversal of antitrust fines; barring this, we expect SIA to report 30% net profit growth. 

• Excluding the reversal, our net profit estimate of S$264m is comparable to consensus estimates (three) of S$258m. 
• We have also assumed that Singapore Airlines (SIA) could report about S$350m in fuel hedging losses at the group level. 
• Our 9MFY16 net profit estimate accounts for 59% of our FY16 estimate. 

• We have assumed an 8% yoy decline in SIA’s pax yields but a qoq improvement. 

• Pax yields have steadily declined across the last two quarters, with the pace of the decline accelerating from -1.8% yoy to -4.6% yoy in 1QFY16 and 2QFY16 respectively. 
• Given that 3QFY16 is seasonally stronger, we have assumed a qoq improvement (10.4 S cents in 2QFY16). Every 0.1 S cents increase from our base estimate of SIA’s pax yield will lead to about a S$21m rise in 3QFY16 net profit. 
• Airline subsidiaries’ profits expected to rise yoy, while SIAEC’s could decline yoy. 
• SIA Engineering Company’s (SIAEC) operating profit is likely to fall, as we expect lower airframe revenue. However, we expect this to be offset by the airline subsidiaries’ improved profitability. 
• Tigerair recorded a S$6m yoy rise in operating profit in 3QFY16, while we expect Scoot to reverse to the black on higher loads and lower fuel costs, vs a loss last year. 
• At the same time, we also expect SilkAir’s profitability to be boosted by fuel cost savings. 

• At the group level, non-operating profit is expected to be boosted by: 

1. SIAEC’s gains on the divestment of an associate, 
2. reversal of antitrust fines, and 
3. lower finance expenses due to the repayment of the S$300m notes in September. 

STOCK IMPACT 

• 3QFY16 will likely be the peak period of fuel hedging losses. 

• In 2QFY16, SIA guided that they have hedged 50.7% of their fuel requirements at US$93/bbl for 2HFY16. The differential between that and the into-plane fuel cost is likely to result in about S$350m in hedging losses. 
• Going forward, we expect SIA’s fuel hedges to show sequential declines, which in turn will lower fuel hedging losses. 

• Key numbers that we would be focusing on are: 

1. SIA’s guidance on future fuel hedges, 
2. pax yields, and 
3. proceeds from aircraft disposal. 

• SIA’s hedge levels for the upcoming periods, along with the extent of pax yield decline, would have a significant bearing on future profitability. Meanwhile, we would also be looking out for the quantum of proceeds from aircraft disposal, which would boost cash flow and help offset capex commitments. 

• SIA secures fifth freedom rights from Canberra and Wellington, but UA announces direct flights from San Francisco commencing in Jun 16. 

• We are positive on the former as it would: 
  1. allow SIA to tap into traffic originating from both the Canberra and Wellington markets, and 
  2. hold scope for feeder traffic beyond Singapore via SIA’s subsidiaries. 
• However, United Airlines’ (UA) launch of direct flights to Singapore could impact SIA’s loads to the West Coast. SIA currently does not operate direct flights to the US. 

EARNINGS REVISION/RISK 

• There is no change to our FY16 net profit estimates. 

VALUATION/RECOMMENDATION 

• Maintain BUY and target price of S$14.00. 

• We continue to value SIA at 1.0x FY17 book ex-SIAEC. As SIA’s fuel hedges unwind, SIA’s fuel hedging losses should be lowered substantially going forward, leading to record FY17 net profits of S$1.5b, the highest in eight years. 
• We like SIA for: 
  1. expected fuel cost savings, 
  2. potential stabilisation in yields, 
  3. expected FY17 core ROEs above cost of equity, and 
  4. the fact that the stock traded at 1.2x book in 2010 when earnings breached S$1b. 
• Maintain BUY with a target price of S$14.00. 

SHARE PRICE CATALYST 

• Higher-than-expected pax and cargo yields.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-01

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.00 Same 14.00