Singapore Airlines - CIMB Research 2016-05-13: Hard for SIA to grow earnings in near term

Singapore Airlines - CIMB Research 2016-05-13: Hard for SIA to grow earnings in near term SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Hard for SIA to grow earnings in near term 

  • SIA’s full-year FY16 core net profit came in 6% below expectations, implying a 4Q that underperformed 22%, mainly due to more-than-expected yield declines. 
  • The group increased its profits in FY16 vs. FY15, as lower oil prices more than offset yield declines, but the incremental fuel price drop will be smaller in FY17. 
  • Juxtapose that against accelerating yield declines, and the group may not deliver EPS growth this year, which is why we have cut FY17-18 core EPS by 29-34%. 
  • We think it is time to lock in SIA’s outperformance, hence we downgrade from Add to Hold; our target is lowered to S$12.42, still based on P/BV of 1.1x (avg since 2001). 

Highlights of FY16 

  • The SIA group grew its full-year core earnings by 61%, as the lagged effect of lower oil prices finally flowed down to the bottom line with the gradual expiry of expensive legacy fuel hedges. 
  • The passenger airlines businesses (mainline SIA, SilkAir, Scoot and Tigerair) all saw improved profits for that reason. SilkAir and Scoot also had the benefit of new 737 and 787 planes, respectively, which helped them to improve operating efficiencies. 

Concerns that muddy the picture of recovery 

  • The 4Q yield declines accelerated across the board, and could extend into FY17. 
  • The continuing decline of mainline SIA’s monthly yields is of special concern, due to weakness in long-haul and premium travel demand. 
  • The cargo business was especially dire, with SIA Cargo delivering its largest loss in almost three years, due to weak demand and excess capacity, causing large yield declines. 

Scoot’s performance extremely good 

  • Scoot was the only airline within the group that did not see its yields decline, despite growing its capacity 41% yoy in 2HFY16. Instead, it reported its second consecutive quarterly profit in 4Q16, which was even higher than the immediately preceding 3Q, and surprisingly equalled that of SilkAir in just a few short years of its existence. This was achieved on the back of strong demand which lifted loads to 85% (the highest in the SIA group), the growing maturity of its route network, and its new and efficient 787s. 

SilkAir continues to deliver the goods 

  • SilkAir delivered much stronger earnings than the year before, with a modest yield drop that was more than offset by a larger unit cost decline. The latter was achieved on the back of the new 737 fleet, capacity expansion and lower oil prices. 
  • Once concern is that SilkAir’s 4Q16 yields fell at a faster pace of 8.2% yoy, vs. 3Q16’s 3.5% decline. 

Can the pace of unit cost declines keep up with lower yields? 

  • The group’s all-in price of jet fuel fell US$33/bbl yoy in FY16 (to US$84), but we forecast it to drop ‘only’ US$13/bbl in FY17 (to US$71), inclusive of hedging losses. This is based on a spot price assumption of US$60 and SIA’s existing 31% hedge book at an average strike price of US$81. The smaller drop is of concern if yield declines accelerate. 

The SIA group may struggle to deliver earnings growth in FY17 

  • The cargo business could see larger losses in FY17, while mainline SIA’s profits could shrink slightly on yield pressures, offset by higher earnings at SilkAir and Scoot. 
  • The net result could be flattish group profits that may not inspire share price performance. 

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-13
CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 12.42 Down 13.00