Singapore Airlines - DBS Research 2016-04-19: Room for higher rebound

Singapore Airlines - DBS Research 2016-04-19: Room for higher rebound SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Room for higher rebound 

  • Raising FY16F/17F profit forecasts by 15%/10% respectively on lower jet fuel price assumptions 
  • Fuel savings more obvious as costly hedges expire 
  • Potential for higher dividends as focus shifts to capital management 
  • Maintain BUY, with TP of S$13.30 (1.1x FY17 P/BV) 


Maintain BUY; beneficiary of low oil price with potential for higher dividends. 

  • We continue to like Singapore Airlines as a beneficiary of the current low oil price environment. 
  • Furthermore, SIA has the potential to pay more dividends as earnings recover and also given that it has over S$3bn net cash on its balance sheet. 


Fuel cost savings to be more substantial as expensive hedges expire and drive earnings recovery. 

  • SIA Group is projected to consume over 40m barrels of jet fuel per year and with jet fuel currently at US$50 per barrel versus nearly US$120 per barrel at end-2014, the Group will reap substantial benefits from lower fuel costs, especially as the more expensive hedges start to expire. 
  • We project SIA’s net profit to rebound from S$368m in FY15 to S$711m in FY16, and by 37% y-o-y to S$976m in FY17 and 8% y-o-y to S$1,052m in FY18. 


Focus could shift to capital management as earnings return to a satisfactory level. 

  • As SIA’s earnings recover to a normalised level, we believe the Group, as well as investors, could shift their attention towards the Group’s cash hoard of over S$3bn or c. S$3.20 per share. 
  • At the minimum, we expect SIA to raise its dividend payout to S$0.50 per share in FY17F and FY18F as earnings improve. 
  • Further upside could come from a return of more cash as special dividends or even capital reduction, as the Group has done in the past. 


Valuation: 

  • Our S$13.30 target price is based on 1.1x FY17 P/BV, which is its historical mean and reflects SIA’s improved earnings and ROE outlook. 
  • With net cash of over S$3 per share, we see current valuation of 0.9x FY17 P/BV as an attractive entry level. 
  • The stock also offers a decent prospective yield of over 4%. 


Key Risks to Our View: 

  • Competition and pressure on yields. 
  • There continues to be intense competition on long-haul routes, especially in the US and Europe segment, where the gulf carriers are aggressive. This leads to pressure on yields, and if they decline more than expected, would impact negatively on SIA’s earnings.





Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-19
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 13.30 Up 11.50


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