Singapore Airlines (SIA SP) - UOB Kay Hian 2016-07-29: 1QFY17 Below Expectations On Steep Cargo And Associate Losses

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-07-29: 1QFY17: Below Expectations On Steep Cargo And Associate Losses SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - 1QFY17: Below Expectations On Steep Cargo And Associate Losses

  • SIA’s 1QFY17 net profit was below expectations due to losses at SIA Cargo and Virgin Australia
  • Still, SIA 1QFY17 core net profit would have reversed from a loss to a S$52.2m profit. 
  • The key positive was better-than-expected profits at the parent airline, whose operating profit rose 83% despite lower yields. 
  • Going forward, we expect lower fuel costs to drive improved profitability in the coming quarters. 
  • Maintain HOLD. Target price: S$11.50.



RESULTS


Earnings below consensus and our expectations.

  • Singapore Airlines’ (SIA) core net profit improved from a loss in 1QFY16 to S$52.2m in profit this quarter, but came in 45% below our estimate. 
  • Consensus estimate of S$118.5m net profit would not have included an exceptional staff cost provision (S$21.3m) relating to SIAEC’s divestment of its investment in HAESL. Excluding that, SIA’s core net profit would be 46% below consensus estimate. The deviation from our and consensus expectations was mainly due to: 
    1. steep losses at SIA Cargo, 
    2. weaker-than-expected performance from Scoot, and 
    3. steep losses at the associate level due to higher share of losses from Virgin Australia (S$41m). 
  • Meanwhile, parent airline operating profit included S$54m in one-time credit on change in revenue recognition on unutilised tickets and S$11.6m in slot compensation, excluding which SIA would have recorded an operating profit of S$131m vs an operating loss in 1QFY16.

Parent airline’s operating performance was better than expected despite weaker yields and higher-than-expected unit costs. 

  • We reckon this could have been due to incidental revenue and will seek clarification during the analyst briefing.
  • Pax yields were lower than expected at 10.30 S cents in 1QFY17, (vs our estimate of 10.40 S cents). We reckon SIA could likely have been affected by lower premium yields or demand, and weaker regional currencies.
  • For 2QFY17, SIA has hedged 37.5% of its jet fuel requirements at US$81/bbl, lower than the quantum and levels of 1Q’s hedges (42% at US$87/bbl). For FY17, we have assumed that SIA hedged 40% of its jet fuel requirements US$78/bbl.
  • Excluding working capital changes, operating cash flow (OCF) rose 20% to S$655.5m. However FCF would have been negative due to an almost doubling of capex.

Wide variance in subsidiary airlines earnings. 

  • SilkAir's operating profit rose five-fold as higher traffic (+12.4%) and lower unit cost (-13%), offset an 8% decline in yields. 
  • TigerAir's S$8m reversal from breakeven levels in the previous quarter was due to flat yields, lower unit cost and flat loads. 
  • Scoot, similarly benefitted from lower fuel cost and increased cost efficiency, leading to S$1m profit vs a S$20m loss previously. However, Scoot’s operating profit was substantially lower than 3Q’s and 4Q’s despite a 55% rise in pax traffic, mainly due to lower yields. Scoot’s pax yields fell 3.8% yoy in 1QFY17, in contrast to stable yields in 4QFY16, which led to the weaker-than-expected performance.

Warns of a challenging operating environment. 

  • SIA indicated that "competition remained intense amid aggressive capacity injection". The airline warned that yields are likely to remain under pressure, especially if the Singapore dollar strengthens against revenue generating currencies.


STOCK IMPACT


The main drag to earnings was SIA Cargo and Virgin Australia. 

  • Parent airline’s profitability improved on the back of lower fuel costs, however this was offset by steep losses at both SIA Cargo and Virgin Australia, which combined, amounted to 144% of 1QFY17’s core net profit. SIA attributed the losses at Virgin Australia to restructuring costs. 
  • Meanwhile, we reckon that cargo yields will likely be weak due to overcapacity and operations could remain in the red in the next few quarters. Going forward we expect much of the improvement in profitability to arise from lower fuel hedging losses as SIA’s hedges unwind.


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain HOLD with target price of S$11.50. We continue to value SIA at 0.9x FY17F core book value ex-SIAEC. We will provide further updates after the analyst briefing.


SHARE PRICE CATALYST

  • Higher-than-expected pax yields and higher-than-expected cargo yields.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-29
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.50 Same 11.50


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