Singapore Airlines - Maybank Kim Eng 2016-06-28: Flight SQ368 on fire

Singapore Airlines - Maybank Kim Eng 2016-06-28: Flight SQ368 on fire  SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Flight SQ368 on fire


A near miss

  • SIA had a near-miss incident as one of its aircraft had engine problems during a flight and caught fire upon landing. There were no injuries or casualties, but the gory pictures of the incident will definitely put off customers. 
  • We believe SIA will have to lower its published fares in the near future to preserve its loads. 
  • We keep our earnings forecasts unchanged, but lower our TP to SGD10.0 as we peg it to its long-term P/BV mean of 0.87x — previously we pegged it to 1SD above its mean.


Details of the incident

  • Flight SQ368 on-route to Milan had an engine problem and fuel leaked two hours into the flight off the coast of Phuket. This prompted the pilot to return to Changi Airport for an emergency landing. The engine and right wing engulfed in flames upon landing and was quickly put out by the fire brigade. Fortunately everyone was safe and there was no injury reported. The cause of the incident is under investigation.


Invokes nightmares of 2014

  • Given the very graphic pictures of flames engulfing the aircraft wing, this will invoke memories of the incidents that gloomed Malaysia and Indonesia back in 2014. The customers’ sentiment will be negative and this may lead to lower take-up rates in the next 2-4 months and impact yields.


Impact will be delayed, but inevitable

  • The northern hemisphere summer is upon us and many have booked their holiday way in advanced. Therefore, we don’t expect any meaningful reductions in SIA’s load factor in Jul-Aug, but things might get unpleasant thereafter. 
  • The reality is consumers have unending choices and the fares are rather cheap nowadays. We believe SIA must provide deep fare discounts to mitigate this small crisis.


Valuations


Trading at close to fair value

  • The share price has been hovering just above its 1SD above its mean since late 2015. It has re-rated in tandem with all the other Asia-Pacific airlines on better earnings outlook.
  • The share price has receded a bit in tandem with weakness in global equities, and of late due to the negative effect of the Brexit referendum. The stock is trading at 0.9x FY17 P/BV, which we deem is close to our fair value of SGD10.0/share, which is premised on SIA’s historical P/BV mean of 0.87x.


Swing Factors


Upside

  • Yield is the most important earnings driver, but the trend has been negative for the past three years.
  • Low fuel price is providing a significant cost reduction and boost to the bottom line.
  • Strong demand and supply scarcity in the region should drive up loads and yields in the medium term.

Downside

  • Tigerair acquisition is costly and the market is keen to see how it extracts value to benefit the Group.
  • An increase in the value of the SGD against destination countries and the USD will have an adverse effect on yields.
  • Increased competitive pressure from the Middle Eastern carriers and also from regional peers who have upgraded their fleets and services.




Mohshin Aziz Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-06-28
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 10.00 Down 11.50


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