Singapore Airlines - CIMB Research 2016-05-15: SIA more attractive after share price drop

Singapore Airlines - CIMB Research 2016-05-15: SIA more attractive after share price drop SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - SIA more attractive after share price drop 

  • After falling 5.2% last Friday in the aftermath of the disappointing full-year results, SIA is trading just below book and is unlikely to fall much further. 
  • SIA is led by a visionary CEO who is pushing product quality forward, integrating Tigerair operationally in the group, and forging global airline partnerships. 
  • Unfortunately, investors may be focusing on its many short-term challenges. 
  • Hence we keep our Hold rating and our target price of S$12.42, still based on an CY16 P/BV of 1.1x (average since 2001). 

Highlights of the analyst briefing 

  • SIA reiterated the many long-term initiatives that it is pursuing, including the introduction of new A350s this year, the ground-up development of new products for the A380s delivering in 2018, the reintroduction of non-stop US flights with the A350ULR from 2018, lounge refurbishments, integration with and between Scoot and Tigerair, and forging global airline partnerships. These will yield returns over time. 

Near-term headaches 

  • In the near-term, however, SIA will face growing yield pressures, with the European situation described as "quite severe", and the transpacific also affected. Southeast Asian yield pressures were comparatively benign. 
  • Last year, average fuel prices fell US$33/bbl yoy (to US$84), which more than offset yield pressures. But this year, the absolute fuel price drop may more than halve to just US$13/bbl yoy (to US$71) just as the rate of yield declines picks up. 
  • Mainline SIA's profits could shrink in FY17. 

Will SilkAir and Scoot continue to deliver better profits? 

  • Both units delivered stronger profits in FY16 on reasonable levels of yoy ASK growth (SilkAir: +9%; Scoot: +26%). But the planned acceleration of ASK growth in FY17 to 17% for SilkAir and to 51% for Scoot increases the risk of accelerated yield deflation that may or may not overwhelm the more modest drop in fuel prices. For instance, Scoot's to-be-introduced Amritsar and Jaipur flights could be challenging to turn profitable. 

Cargo business very weak 

  • The air freight business is another near-term headache, as mirrored by the way container freight rates have collapsed to next-to-nothing. This is driven partly by overcapacity, and partly by the weakness in global trade growth. In this context, SIA Cargo's planned capacity expansion of 3-4% in FY17, due to passenger aircraft bellyhold expansion more than offsetting a reduction in its fleet of dedicated freighters from nine to seven 747Fs, is unhelpful. 

Near-term catalysts missing from SIA 

  • As a result of the various challenges noted above, SIA's share price may struggle to perform until the global economy turns around in a more decisive fashion, leading to stronger premium travel and air freight demand. 
  • In the meantime, SIA will simply do what it does best and plan for a brighter future. 
  • Please click here for our earlier results review, where we had downgraded the recommendation from Add to Hold, reduced FY17-18 forecasts by 29-34%, and lowered the target price to S$12.42.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-15
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 12.42 Same 12.42