Singapore Airlines - OCBC Investment 2016-06-20: Cheaper fuel still the main earnings driver

Singapore Airlines - OCBC Investment 2016-06-20: Cheaper fuel still the main earnings driver SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines: Cheaper fuel still the main earnings driver

  • May PLF (passenger load factor) declined on softer demand
  • Keeping its presence felt at VAH (Virgin Australia Holdings)
  • Maintain BUY

Strong operational statistics for subsidiaries

  • Singapore Airlines’ (SIA) operating results for May 16 came in weak for the parent airline while both SilkAir and Scoot continued to show growth momentum. 
  • Overall passenger load factor (PLF) for May 16 fell 0.8ppt YoY to 73.6% as capacity growth of 2.9% outpaced traffic growth of 1.8%. 
  • For parent airline, passenger loads declined 2.9% YoY on softer demand across all regions except East Asia region while capacity only fell 1.6%, leading to a 0.9ppt decline in PLF to 72.7%, the lowest since May 09. 
  • SilkAir’s posted solid performance as passenger loads for May 16 grew 16.7% YoY, which exceeded capacity growth of 15.1% resulting in a 0.9ppt improvement in PLF to 69.5%. 
  • Another positive came from Scoot as it continued its strong growth momentum as May 16 passenger loads jumped 56.9% YoY but outpaced by capacity growth of 60.1% as number of aircraft increased from six to eleven. 
  • Consequently, PLF dropped 1.6ppt YoY to 78.1%.

Committed to stake in VAH

  • Last month, VAH announced strategic alliance with HNA Aviation Group (HNA), which will make an equity investment to own 13% stake in VAH, with the intention to increase up to 19.99%. 
  • Also recently, Air NZ announced sale of its 19.98% stake in VAH to Nanshan Group (Nanshan). 
  • And just last week, VAH announced equity raising in the form of 1:1 non-renounceable pro-rate entitlement offer to shareholders, where all shareholders except Etihad Airways have committed to take up their pro-rata entitlements. 
  • SIA also further committed to subscribe for excess entitlements. 
  • At the end of all these shareholding changes, and assuming Etihad did not take up its entitlements, SIA’s stake may potentially increase up to 25.9% to become the largest shareholder. 
  • In our view, the strategic alliance with HNA will help VAH compete against Qantas with enhanced connectivity to China over the longer-term.

Fuel savings and cheaper fuel to drive earnings

  • Operating in weak yields environment, we expect SIA’s FY17F earnings to be driven by much lower hedging losses and higher fuel savings from new aircraft being delivered over the year, offsetting lower yields. 
  • At current share price, maintain BUY with an unchanged FV of S$12.00.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-06-20
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 12.00 Same 12.00