Singapore Airlines - OCBC Investment 2016-03-18: Cheap jet fuel to lift FY17 earnings

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SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines: Cheap jet fuel to lift FY17 earnings 

• Strong operating results 
• Fuel savings to offset low yields 
• Upgrade to BUY 

Solid operating statistics a pleasant surprise 

• Singapore Airlines’ (SIA) operating results for the first two months (i.e. Jan & Feb 16) of 4QFY16 came in strong with overall passenger traffic YoY growth (Jan: +6.8%, Feb: +8.4%) outpacing capacity growth (Jan: +2.0%, Feb: +5.4%). 
• Despite mixed global economic data, traffic for its parent airline grew 3.8% and 5.1% YoY, which led to a 3.7ppt and 2.2ppt improvement in passenger load factors (PLF) in Jan 16 and Feb 16, respectively. 
• The improvements in PLF were broad-based across all regions supported by promotional activities, led by East Asia (+6.5ppt) in Jan 16 and Europe (+4.3ppt) in Feb 16. 
• Traffic growth were also strong for both SilkAir (Jan: +17.5%, Feb: +11.6%) and Scoot (Jan: +46.0%, Feb: +48.2%), supported by East Asia and Pacific growth for the former and addition of new destination to Guangzhou in mid-Jan 16 for the latter. 
• Unsurprisingly, SIA Cargo continued to register weak cargo loads on persistent industry overcapacity. 

Sacrificing yields for loads 

• While operating results were encouraging, we believe SIA may be sacrificing yields to ensure stable passenger loads. 
• Pricing competition is likely to persist as Gulf carriers continue to expand into SIA’s key routes to Europe and the low oil price environment may exacerbate such competition since it increases the ability of airlines to price down tickets. 
• Being one of the key beneficiaries of cheap jet fuel, SIA is also likely able to compete on pricing through promotional activities to maintain its market share, at least on its key Europe routes. That said, we expect cheap jet fuel to more than offset the low yields in FY17. 
• In addition, we expect profitability on both SilkAir and Scoot to improve further, and potentially even more if interlining traffic between Scoot and Tigerair can be captured effectively. 

Raise FV to S$12.50 on higher valuation peg 

• Keeping our forecasts unchanged for now, we raise our target peg from 1.0x to 1.1x FY17F P/B (-0.25SD 10-year mean), as we expect the more expensive hedges to progressively unwind and provide a lift to earnings in FY17. 
• Consequently, our FV increases from S$11.70 to S$12.50 and we upgrade SIA from HOLD to BUY.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-03-18

OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 12.50 Up 11.70