Singapore Airlines SIA - UOB Kay Hian 2016-02-10: Resilient Front-end Yields And Optimistic On SilkAir And Scoot

Singapore Airlines SIA - UOB Kay Hian 2016-02-10: Resilient Front-end Yields And Optimistic On SilkAir And Scoot SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Resilient Front-end Yields And Optimistic On SilkAir And Scoot 

  • We met with SIA’s management. SIA’s strong 3QFY16 results and qoq improvement in pax yields underscore the impact of lower fuel hedges and the resilience of front-end yields. 
  • Forward bookings were also higher as compared with a year ago. 
  • Going forward, we expect SIA’s earnings to improve as fuel hedges unwind, combined with improved profitability of SilkAir and Scoot, as well as stabilising yields. 
  • We trim our target price slightly to S$13.90 as we assume lower cargo yields. Maintain BUY


Takeaways from the corporate luncheon are as follows:

 Operating margin of 7.3% was the highest in five years. 

  • The decline in revenue on the back of lower yields was less than the decline in opex (mainly fuel cost) and this led to the incremental operating margin. A weaker Singapore dollar however led to net S$65m negative impact on net profit. 
  • Going into FY17, earnings are likely to improve further as: 
    1. fuel hedges unwind, 
    2. yields stabilise as more premium economy seats are launched, and 
    3. SilkAir and Scoot’s profitability improves with more fuel efficient aircraft. 

 Strong qoq improvement in pax yields underscores resilient front-end yields. 

  • Despite weakness in the oil and gas sector and job attritions in the financial sector, SIA’s corporate travel market held its own. In addition, SIA indicated that demand for premium economy seats were especially strong on London, Sydney and Auckland routes with loads of 80% and higher, but cautioned that it was weak on Chinese and Indian routes. 
  • SIA also indicated that forward bookings were higher as compared with a year ago, for both business and economy class, but was stronger for back end. This holds scope for stable yields in 4QFY16. Forward bookings, as at 3QFY16, rose 6.6% yoy. 

 Optimistic on SilkAir, Scoot but negative on SIA Cargo. 

  • SIA indicated Scoot’s capacity is likely to rise by 20-30% over the next few years and envisions strong demand and improved operating efficiency on new aircraft. 
  • We believe that Scoot will become increasingly material to SIA group’s earnings. 

 The same goes for SilkAir, whose breakeven load factor at 64% is substantially lower than SIA’s 77%. 

  • On the cargo front, SIA lamented that yields were exceptionally weak across most sectors due to overcapacity in the region. 
  • We have thus lowered our cargo yield assumptions for FY16 and FY17 by 2% and 3% respectively. 

 Strategy to combat Gulf carriers via codeshares with partner airlines. 

  • SIA highlighted that together with its codeshare partners, it connects to greater destinations and has higher frequencies than Emirates and its partners. 
  • Also, SIA’s enhanced codeshare partnership with Lufthansa has not yet secured regulatory approval but following which, both carriers will operate revenue sharing on Singapore - Zurich, Singapore - Dusseldorf, Singapore - Munich and Singapore - Frankfurt. SIA will then be able to tap on to corporate travel in the region and provide further connection to South West Pacific. 
  • There is also the potential for yield accretion as Lufthansa’s pax yield is about 27% higher than that of SIA. 


 Expect upward earnings revisions. 

  • We believe that the street will raise earnings estimates, factoring in lower fuel hedging losses as well as improvements at Scoot. 


 We lower our FY16 net profit estimates by 13%, 

  • as we exclude the reversal of cargo antitrust fines and assume lower cargo yields, but raise our pax yield assumptions. SIA has guided that the reversal of cargo fines may take longer than expected. We also reduce our FY17 net profit estimates by 5%, as we lower our cargo yield estimates. 


 Maintain BUY but lower our target price marginally to S$13.90 (from S$14.00). 

  • We continue to value SIA at 1.0x FY17 book value. We have assumed a FY16 final dividend of 38 S cents (65% payout ratio, ex-SIAEC’s divestment gains), as SIA indicated that SIAEC’s restructuring of JVs may not be completed in 4QFY16. 
  • We still like SIA for the expected fuel cost savings as fuel hedges unwind, the increasing potential for stable yields as well as the expected improvement in SilkAir and Scoot’s profitability. 
  • Maintain BUY with a target price of S$13.90.


  • Higher-than-expected pax and cargo yields.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.90 Down 14.00