Singapore Airlines SIA - UOB Kay Hian 2016-02-05: 3QFY16 Surprises With Strong Yields And Incremental Profits From SilkAir And Scoot

Singapore Airlines SIA - UOB Kay Hian 2016-02-05: 3QFY16 Surprises With Strong Yields And Incremental Profits From SilkAir And Scoot SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - 3QFY16: Surprises With Strong Yields And Incremental Profits From SilkAir And Scoot 

  • SIA delivered a strong set of 3QFY16 results which exceeded expectations. 
  • SIA did not recognise gains on SIAEC’s disposal of HAESL or reverse cargo antitrust fines in this quarter. Excluding these, net profit was boosted by the strong performances of parent airline and subsidiaries. 
  • Parent SIA’s operating profit surged on fuel cost savings, and yields even improved 6% qoq. 
  • SilkAir also delivered with an 83% yoy operating profit growth. In addition, Scoot made a turnaround and posted its best quarter of earnings yet. 
  • Maintain BUY. Target price: S$14.00. 


RESULTS 


• Net profit came in 127% higher than our estimates and 139% higher than consensus’ implied estimates. 

  • SIA did not recognise any gains on disposal of HAESL (SIA Engineering’s associate) or reverse air cargo antitrust fines as we had assumed. 
  • Excluding that, SIA net profit of S$274.9m was 127% higher than our estimate and slightly higher than consensus estimates. 
  • The variance was due to: 
    1. higher-than-expected pax yields (11 cents vs 10.55 cents estimate), 
    2. lower fuel hedging losses (S$299m vs S$350m), and 
    3. disposal gains of S$53.3m vs our estimate of no gains. 
  • Both SilkAir and Scoot fared better than expected. 
  • Net profit excluding EI fared even better with an 88% growth 

• Pax yields improve qoq. 

  • SIA’s pax yield at 11 S cents was 5.8% higher qoq and just 4.3% lower than the previous period. 
  • Despite a higher base and weaker fuel prices, the pace of decline in pax yields matched that of 2Q’s. This implies that yields on premium travel were not adversely impacted despite the weakness in the O&G sector or the broad-based economic malaise. 

• Strong showing from SilkAir and Scoot. 

  • Both SilkAir’s revenue and cost improved, leading to an 83% yoy rise in operating profit to S$33m, while Scoot had its best quarter ever with an S$18m profit (-S$17m previously). 

• Cargo operations, while profitable, disappointed as yields fell 13.5% yoy. 

  • Consequently, operating profits fell 88% yoy. SIA attributed the decline to continued overcapacity and a high base in 3QFY15 as cargo operations benefitted from port disruptions in the US and Manila. 


STOCK IMPACT 


• Good set of results, expect further earnings revisions, 

  • ... particularly on the back of strong yields and earnings reversal by Scoot. Our FY16 net profit estimates are 55% higher than consensus. 

• SIA also guided that it has hedged 46.6% of 4QFY16’s fuel requirements at US$90/bbl

  • ... vs 54.6% at US$96/bbl for 3QFY16. The lower level and the quantum of hedges hold scope for even lower fuel costs in 4QFY16. 

• Forward sales point to a better 4QFY16, while sale of aircraft reduces residual value risk. 

  • SilkAir disposed of four B737-800s, while a 747-400 freighter was sold for S$10m. This resulted in a gain of S$53m and proceeds of S$312m. 


EARNINGS REVISION/RISK 

  • There is no change to our FY16 net profit estimates. 
  • We will provide further updates post the analysts’ briefing. 


VALUATION/RECOMMENDATION 


• Maintain BUY and S$14.00 target price. 

  • 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. 
  • There is also the increasing possibility that competitive pressures are likely to abate as airlines seek to maximise profit in a low fuel cost environment. 
  • 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/ 2016-02-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.00 Same 14.00


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