Singapore Airlines (SIA SP) - UOB Kay Hian 2016-05-16: Analyst Briefing Takeaways: Uncertainty Over Yield And Capex Funding Will Cap Upside

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-05-16: Analyst Briefing Takeaways ~ Uncertainty Over Yield And Capex Funding Will Cap Upside SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Analyst Briefing Takeaways: Uncertainty Over Yield And Capex Funding Will Cap Upside

  • Our earlier bullish stance on SIA was based on the assumption that yields will stabilise as competitive pressures abate. 
  • We stand corrected as SIA now faces uncertain yields amid a weak economic environment. 
  • While we still expect core net profit to rise in FY17, this is mainly due to the assumption of a 66% decline in fuel hedging losses. 
  • Our fair value P/B multiple is reduced to 0.9x from 1.0x ex-SIAEC. 
  • Downgrade to HOLD, with a lower target price of S$11.60. Entry price: $10.20.



WHAT’S NEW

  • Takeaways from the analysts briefing are as follows:

SIA attributed the 7% pax yield decline to a soft global economy and intensecompetition as competitors continue to inject capacity. 

  • The decline was mainly led by weakness on Europe routes, and also across the Pacific. 
  • Heavy discounting by competitors due to low fuel prices also affected yields. 
  • Essentially, we believe that 4QFY16’s weak yields reflect a weaker economic environment vs 2QFY16’s and 3QFY16’s where yields were more affected by price competition from airlines with lower fuel hedges. 
  • In addition, Singapore Airlines’ (SIA) weak yields relative to Scoot’s firm yields suggest the airline faces pressure on long haul routes. 
  • We are also unsure if the recent codeshares will be successful in mitigating yield pressures.

The steep S$95m rise in maintenance cost was mainly due to provisions for return of aircraft checks on leased aircraft. 

  • While management did not specifically allude to the type of aircraft for return of leases, we reckon this could be for the A330s or the A380s, five of which are due for renewal soon. 
  • SIA indicated that maintenance costs should normalise going forward. This, however, has negative implications for SIAEC. SIA work accounts for about 64% of SIAEC’s revenue.

Steep losses at cargo operations were due to weak yields amid industry overcapacity; plans to ground two freighters. 

  • Cargo yields were the lowest in 12 years and SIA did not guide for any improvement.

SIA attributed the weaker JV contribution and losses at the associate level to poorer performance from overall JVs and associates. 

  • While the poorer performance at subsidiary SIAEC’s JVs would have contributed to the decline in share of profits, we reckon that the contributions were dragged down by Virgin Australia and Vistara. 
  • More importantly, SIA did not rule out the possibility of further capital injection into these airlines. Along with the substantial capex commitments going forward, we are concerned about the risk to capital.



STOCK IMPACT



Uncertainty over SIA’s pricing power/yields would likely curb upside for the share price performance. 

  • While the extent of pax yields decline improved in 2QFY16 and 3QFY16, this reversed in 4QFY16 with yields falling 7% yoy to 10.60 S cents, the lowest in 6 years. 
  • Given the global economic malaise, yields could further weaken going forward and limit stock price upside.

Substantial capex commitments could require further debt funding and could limit dividend payout. 

  • Historically, SIA has funded capex with a mixture of operating cash flow (OCF) and proceeds from aircraft sales. 
  • In FY16, capex amounted to 83% of OCF and proceeds from aircraft sales combined. 
  • Given that capex is expected to rise to S$3.4b-5.1b over the next three years, the ability to fund this via internal cash flows and aircraft sales remains uncertain. 
  • We have assumed that SIA will require external funding of S$1.6b and S$1.8b in FY18 and FY19 respectively, after assuming a 63% yoy rise in aircraft proceeds from FY16’s.

We still expect SIA’s FY17 core net profit to rise by 24% yoy as fuel hedging losses are estimated to narrow substantially from the $1.16b recognised in FY16. 

  • We have assumed that SIA will hedge 40% of its fuel requirements at US$76/bbl. 
  • SIA guided that it had hedged 25% of FY17’s fuel requirements at US$83/bbl jet fuel and a further 6% on Brent at US$64/bbl.



EARNINGS REVISION/RISK

  • We cut our FY17 core net profit estimate by 31%, as we assume a 2% decline in FY17 pax yields (vs flat previously) as well as lower cargo yields. 
  • We have also assumed that S$180m in gains from divestment of SIAEC’s investment would be recognised in FY17.



VALUATION/RECOMMENDATION

  • Downgrade to HOLD and lower our target price by 17% to S$11.60. 
  • We ascribe a lower P/B multiple of 0.9x to SIA’s FY17 book ex-SIAEC, given limited upside due to uncertainty over yields and the potentially lower dividend payout.



SHARE PRICE CATALYST

  • Higher-than-expected pax and cargo yields




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-16
UOB Kay Hian SGX Stock Analyst Report HOLD Downgrade BUY 11.60 Down 13.90


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