Singapore Airlines SIA - UOB Kay Hian 2016-05-13: 4QFY16 Below Expectations On Higher Cargo Losses And A Steep Rise In Maintenance Costs

Singapore Airlines SIA - UOB Kay Hian 2016-05-13: 4QFY16 Below Expectations On Higher Cargo Losses And A Steep Rise In Maintenance Costs SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines SIA - 4QFY16 Below Expectations On Higher Cargo Losses And A Steep Rise In Maintenance Costs

  • SIA’s 4QFY16 core net profit was 57% and 52% below our and consensus estimates respectively, mainly due to higher cargo losses and a steep S$95m rise in MRO costs. 
  • Pax yield was also 2.5% lower than our estimate. Excluding EI, 4QFY16 core net profit would have risen 205% yoy to S$121m. 
  • We intend to seek clarification at the analyst briefing on the decline in pax yields, the reasons behind losses from associates and the steep increase in maintenance cost. 
  • Maintain BUY and target price of S$13.90 pending the analyst briefing.



• Earning below expectations on higher cargo losses and a steep increase in maintenance costs. 

  • The latter rose by S$95m at the parent airline, while a lower-than- expected pax yield led to a S$57m variance in revenue. 
  • Parent airline’s pax yield at 10.6 S cents was 2.2% lower than our estimate. 
  • Singapore Airlines’ (SIA) cargo losses were also more than double our estimate. Losses at the associate level came as a surprise and suggest that both 23%-owned Virgin Australia and 49%-owned Vistara could have been in the red. 
  • Exceptional items amounted to S$104m, mainly due to an S$117m refund of anti-trust cargo fines. 
  • SIA declared a final dividend of 35 S cents (+106%).


• Pax yields fell 7% yoy in 4QFY16, accelerating from 3QFY16’s 4.3% decline. 

  • The steep decline comes as a surprise and could be due to a stronger Singapore dollar or weaker premium loads.


• Hedged 25% of FY17 jet fuel requirements at US$83/bbl and a further 6% on Brent at US$64/bbl. 

  • For 1QFY17, SIA has hedged 42% at US$87/bbl.


• Strong showing from Scoot with operating profit doubling qoq. 

  • Scoot’s revenue rose 49% yoy on higher loads and stable yields yoy, leading to a reversal from a loss in 3QFY16 to a S$32m operating profit in 4QFY16. 
  • Meanwhile, SilkAir benefitted from lower costs but yields fell 8% yoy.


• Cash and equivalents fell 21% yoy 

  • Cash and equivalents fell 21% yoy to S$3.9b on the back of a 12% rise in capex and $300m in debt repayment.
  • SIA expects the A350-900 to boost efficiency and also guided that advance bookings are “tracking positively against seat capacity”. Underscoring this, advance bookings rose by 11% to S$1.6b.



STOCK IMPACT

  • We plan to seek clarification on the following at an analysts briefing:
    1. Reasons behind the decline in pax yields and the potential for yield/load improvement following codeshares with Lufthansa and possibly Air France KLM.
    2. Reasons behind the losses from associates and if SIA plans to inject further capital into Virgin Australia or Vistara
    3. Reasons behind the steep 30% increase in maintenance costs and whether it will normalise.
    4. If SIA intends to ground more freighters, given the extent of cargo losses.



EARNINGS REVISION/RISK

  • We have not revised our earnings assumption and will do so post the analyst briefing. 


VALUATION/RECOMMENDATION

  • No change to our target price and recommendation pending the analyst briefing. 



SHARE PRICE CATALYST

  • Higher aircraft sales and stable yields.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-13
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.90 Same 13.90


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