Singapore Airlines - DBS Research 2016-05-13: Portfolio strategy paying off

Singapore Airlines - DBS Research 2016-05-13: Portfolio strategy paying off SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Portfolio strategy paying off

  • FY16 headline profit of S$804m rose 119% y-o-y
  • Core profit below our forecast due to soft yields at SIA main line and wider losses at SIA Cargo
  • Lower fuel costs and growth at other subsidiaries to drive earnings growth
  • Maintain BUY, TP S$12.50.



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.


Momentum from strong performances at Silkair and Scoot, and recovering Tigerair. 

  • While SIA’s flagship passenger business is facing tepid demand, its subsidiaries Scoot and Silkair experienced strong top- and bottom-line growth in FY16, which is slated to continue. 
  • Meanwhile, Tigerair should also continue its earnings rebound following its capacity curtailment. 
  • We project EBIT contribution from these three airlines to nearly double to S$260m by 2018F.


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 EBIT to continue its rebound from S$681m in FY16 (+66% y-o-y) to S$954m in FY17F and S$1,094m in FY18F, led by growth at its subsidiaries Silkair, Scoot and Tigerair, and lower fuel prices.



Valuation:

  • Our S$12.50 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 1x 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 segments, 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/ 2016-05-13
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 12.50 Down 13.30


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