Singapore Airlines - OCBC Investment 2016-05-16: Cheap Fuel Helps Amid Weak Yields Outlook

Singapore Airlines - OCBC Investment 2016-05-16: Cheap Fuel Helps Amid Weak Yields Outlook SIA SINGAPORE AIRLINES LTD C6L.SI 


  • FY16 missed expectations
  • Battle of yield vs. unit cost
  • Lower FV of S$12.00

FY16 core PATMI almost doubled but still missed consensus

  • Singapore Airlines’ (SIA) FY16 revenue declined 2.2% to S$15.2b on lower yields at parent airline and its cargo business, but partially offset by revenue growth from SilkAir and Scoot on capacity and carriage growth. 
  • FY16 net fuel cost declined 18.9% to S$4.5b despite a 41.3% plunge in average jet fuel price, as it was partially offset by a 107.4% increase in hedging loss. 
  • Stripping out certain one-off non-operating items including dividends from investment (~S$100m) and refund of fines to SIA Cargo (~S$117m), FY16 core PATMI rose 95.0% to S$701.6m; but still came in below the street’s and our expectations, and formed 92.2% of our FY16 forecast. 
  • Parent airline and SIA Cargo saw FY16 yield declined 5.4% and 11.6%, respectively, mainly on excess capacity in the market. 
  • While SilkAir (+9%) and Scoot (26%) embarked on capacity expansion in FY16, yields only declined 2.9% for SilkAir and was flat for Scoot.

Improved fuel hedges and newer aircraft to help

  • We believe SIA’s improving fuel hedges couldn’t have come at a better time – a period of intense competition where weak yield environment is the result. In our view, the key factor is whether SIA’s declining unit cost from cheaper jet fuel is able to outpace the weak yields outlook. 
  • With SIA planning to takes delivery of 13 new fuel-efficient A350-900s and returning five less fuel-efficient aircraft to lessors in FY17, we expect more fuel costs savings other than that from improved fuel hedges, but full impact only from FY18 onwards. 
  • FY17 will also see the first full-year impact of Scoot using its fleet of 10 new fuel-efficient B787s. Note that Scoot benefited from rapid expansion and delivery of the new B787s throughout FY16 recording a S$95m improvement in operating profit to S$28m. 
  • We also expect more meaningful impact in FY16 from SIA enhancing connectivity between Scoot and Tigerair network. 
  • All said, we expect decline in costs driven mainly by cheaper fuel to mitigate the weak yields environment.

Lower FY17 forecasts

  • Hence, after factoring in for weak yields ahead, we cut our FY17 EPS by 12.8% and introduce FY18 forecasts. 
  • At current share price level, maintain BUY, even though we lower our FV from S$12.50 to S$12.00.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-05-16
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 12.00 Down 12.50