Singapore Airlines - UOB Kay Hian 2016-03-16: Ytd Pax Load Factor Rises 3ppt, While Scoot’s Traffic Grows A Whopping 47% In 2M16

Singapore Airlines SIA - UOB Kay Hian 2016-03-16: Ytd Pax Load Factor Rises 3ppt, While Scoot’s Traffic Grows A Whopping 47% In 2M16 SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Ytd Pax Load Factor Rises 3ppt, While Scoot’s Traffic Grows A Whopping 47% In 2M16 

  • In an environment of weak jobs growth and soft global economy outlook, SIA’s strong traffic numbers highlight a willingness to travel for both the full-service and low-cost segments. 
  • This, along with stronger loads, more fuel-efficient aircraft, as well as low fuel prices, should lower the risk profile of the group. 
  • Maintain BUY. Target price: S$13.90. 


WHAT’S NEW 


 Eighth consecutive month of improvement in SIA’s pax loads. 

  • SIA’s pax load factor surged by 2.2ppt in Feb as traffic growth (+5%yoy) outpaced capacity growth. 
  • There was broad-based improvement in load factor across all regions, with Europe showing the biggest improvement (+4.3ppt). This is especially encouraging, given the Europe sector’s significance to SIA due to its relatively higher premium traffic. 
  • Overall, SIA’s pax loads averaged 78.9% in Jan-Feb 16, significantly higher than the previous year (75.8%). 

 Strong traffic growth for SilkAir and Scoot. 

  • SilkAir’s 11.6% pax traffic growth in February was led by demand out of East Asia, Pacific and West Asia regions. 
  • Meanwhile Scoot’s traffic grew by a whopping 48% yoy in Feb 16, but capacity expanded at a faster rate as the tenth B787 Dreamliner entered the fleet in Jan. 

 Weak cargo loads do not come as a surprise, but cargo yields likely to be weaker than expected. 

  • SIA’s cargo loads fell 4.3ppt in February on the back of a decline in cargo traffic (-2.3% yoy), exacerbated by capacity expansion. SIA had earlier warned on weakness in cargo due to overcapacity in the region and soft demand. 
  • We reckon that cargo yields could have been adversely affected. There is some downside risk to our cargo yield estimates as we have factored in a 8.6% decline in cargo yields vs a 10.3% decline as at 9MFY16. 


STOCK IMPACT 


 Positive implications for 4QFY16. 

  • SIA’s continued improvement in pax load factors and subsidiaries SilkAir and Scoot’s strong traffic growth underscore SIA’s improving operational strength. This, along with lower fuel cost as well as more efficient aircraft, is expected to lead to increased profitability in 4Q. 
  • Ytd, SIA has achieved pax loads of 79.8%, higher than our assumption of 79.5% for FY16. There is upside risk to our earnings estimates. 

 Pax yields likely to be resilient, given strong loads on long-haul routes. 

  • SIA is gradually rolling out greater premium economy seating and we reckon that it is well received by the marketplace. 
  • In addition, loads to Europe remain strong and SIA’s CEO has been on record as stating that there is no weakness seen in business traffic. Thus, pax yields are likely to be resilient in 4QFY16. However, we are cognisant of the risk to business traffic and yields, given recent downsizing in the financial sector. 


EARNINGS REVISION/RISK 

  • No change to our earnings estimates. 


VALUATION/RECOMMENDATION 


 Maintain BUY with unchanged target price of S$13.90. 

  • We continue to value SIA at 1.0x FY17F book value. We expect SIA’s FY17 earnings to improve, driven by increased profitability of SilkAir and Scoot, more efficient aircraft, as well as low fuel prices as fuel hedges unwind. 
  • We also like SIA for its expected ROE (3Y SIA ex-SIAEC avg: 8.8%) above cost of equity (7%), and stabilising yields. Maintain BUY with a target price of S$13.90. 


SHARE PRICE CATALYST 

  • Higher-than-expected pax yields.



K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-16
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.90 Down 14.00


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