Singapore Airlines SIA - UOB Kay Hian 2016-04-27: 4QFY16 Results Preview ~ Expecting Earnings To Rise 603% yoy

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SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - 4QFY16 Results Preview: Expecting Earnings To Rise 603% yoy

• We expect SIA to post record profits in 4QFY16, as load factors improve across parent and all airline subsidiaries while low fuel prices lead to lower unit costs and consequently lower breakeven load factors. 
• Key numbers we will be looking out for include: 
  1. the extent of pax yield erosion, 
  2. SIA’s guidance on future fuel hedges, and 
  3. performance of the airline subsidiaries. 
• Maintain BUY. Target price: S$13.90.

WHAT'S NEW

• Expecting a 603% yoy rise in 4Q core net profit on the back of: 
  1. higher pax loads, 
  2. lower fuel costs, and 
  3. improved profitability of SilkAir and Scoot. 
• Our 4Q core net profit estimate is 59% above consensus quarterly estimates (2 estimates) and 183% above consensus’ implied 4Q net profit of S$98m based on full-year estimates. We also forecast a final dividend of 37 S cents/share (+118% yoy, payout ratio: 65%). There is a possibility of a further 12 S cents/share payout if the divestment of HAESL is completed in 4Q assuming full payout of the divestment gains.
• We have assumed a 4.8% yoy decline in SIA’s 4Q pax yields, higher than 3Q’s 4.3% decline. Given the recent job attritions in the financial sector, we expect some erosion in premium traffic loads and hence expect a greater 4.8% yoy decline in pax yields (vs 3Q: - 4.3%).
• Expecting unit cost to fall yoy and qoq, on the back of lower fuel cost. We have assumed a 11% yoy decline in SIA’s unit cost (-6% qoq), given that average jet fuel prices have fallen 22% from 3QFY16’s average. We have also assumed that SIA could report approximately S$260m in fuel hedging losses at the group level, lower than 3Q’s S$299m. Meanwhile, non-fuel unit cost could see a slight uptick on higher staff costs.
• Expecting record profits for SilkAir and Scoot, while SIAEC’s could rise yoy. SIAEC’s operating profit is likely to rise 34% yoy on the back of higher line maintenance profit due to strong flight movement and visitor arrival growth at Changi Airport. With about 78% share of line maintenance at Changi, the incremental volume should lead to improved margins and boost operating profits for SIAEC. Meanwhile, we expect Scoot’s operating profit to rise qoq, boosted by fuel cost savings as well as higher loads. SilkAir is also expected to post record operating profits on the back of lower unit costs, higher loads (+2.5ppt yoy), as well as higher qoq pax yields.
• SIA Cargo likely to be in the red, due to: 
  1. lower loads, and 
  2. weak cargo yields. 
• SIA Cargo’s load factors fell 2.5ppt yoy in 4Q on the back of a decline in cargo traffic. Given weak cargo demand and the soft global economy, we have also assumed a 14% yoy decline in cargo yields (-5.6% qoq), approximating 2009 levels.

STOCK IMPACT

 Higher pax loads and lower fuel costs to lead to record 4QFY16 profits. 

• In 4QFY16, SIA and all subsidiary airlines’ pax loads rose yoy. SIA’s improved operational performance as pax load factors rise across the parent airline and subsidiaries is a key positive. Meanwhile, SIA has guided that they have hedged 46.6% of their 4QFY16 fuel requirements at US$90/bbl (3Q: 54.6% at US$96). Thus, lower fuel prices and lower fuel hedges would lead to a substantial decline in unit costs and lower breakeven load factors. 
• The lower breakeven load factors, combined with the higher loads achieved, should result in higher breakeven load factor spread and thus increased profitability in 4QFY16.
• Key numbers that we would be focusing on are: 
  1. pax yields, 
  2. SIA’s guidance on future fuel hedges, and 
  3. performance of the airline subsidiaries. 
• The extent of pax yield decline, as well as SIA’s fuel hedge levels for the upcoming periods, would have a significant bearing on future profitability. Meanwhile, the airline subsidiaries are also expected to play an increasingly significant role to SIA’s profitability. 
• As for cash flow, we also would be looking out for the quantum of proceeds from aircraft disposal, which would help offset capex requirements. Upside catalysts would be continued low fuel prices, increased profitability of SilkAir and Scoot, and higher-than-expected yields.

 Share price has lagged street earning upgrades. 

• Since late-February, share price performance has remained lacklustre despite the fact that consensus has upgraded earnings estimates in the past four weeks. We believe the disconnect between share price performance and street expectations could be due to: 
  1. concerns on pax yield erosion, or 
  2. the market has yet to factor in the full impact of lower fuel prices on operating costs. 
• Should pax yields stabilise or SIA show significant unit cost reductions in the upcoming 4Q results, we believe the stock could be re-rated upwards.

EARNINGS REVISION/RISK

• There is no change to our FY16 net profit estimates.

VALUATION/RECOMMENDATION

Maintain BUY and S$13.90 target price. 

• We continue to value SIA at 1.0x FY17F book ex-SIAEC. 
• Going into FY17, we expect SIA to benefit from fuel cost savings as its fuel hedges unwind. In addition, we also expect SIA’s FY17 earnings to improve on the back of increased profitability of SilkAir and Scoot. 
• 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/ 2016-04-18

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.90 Same 13.90