Singapore Airlines - UOB Kay Hian 2016-07-19: Earnings Headwinds Amid Recent Attacks In Europe

Singapore Airlines (SIA SP) - UOB Kay Hian 2016-07-19: Earnings Headwinds Amid Recent Attacks In Europe SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Earnings Headwinds Amid Recent Attacks In Europe

  • About 30% of SIA’s capacity in seat-km terms is devoted to Europe, a region which has seen a spate of terrorist attacks. 
  • We believe demand for travel to the region will be impacted in the coming quarters and yields could also be affected as a result. 
  • We thus lower our FY17 pax yield and earnings estimates and derive a marginally lower target price of S$11.50
  • Barring a steep decline in earnings and cash flow, we believe SIA’s share price will be supported by the attractive 4.6% FY17 dividend yield. 
  • Maintain HOLD. Preferred entry level at S$10.30, or 5% yield.



WHAT’S NEW


Recent spate of attacks in Europe and coup attempt in Turkey likely to lower traffic loads and yields to Europe. 

  • The attacks have resulted in numerous fatalities and are likely to affect travel to the region. Europe is a significant market for Singapore Airlines (SIA) with 14 destinations within Europe and about 30% of SIA’s seat capacity in km-terms is directed to Europe (France: 2.8%). 
  • Going forward, we expect tourism and pax traffic to Europe to be adversely impacted in the near term and SIA’s loads and yields to Europe are likely to decline.

Even prior to the attack in Nice, SIA’s pax loads to Europe have weakened for three consecutive months. 

  • In June, load factor to Europe fell by 5ppt yoy, accelerating from the declines in April and May (Apr: -0.6%, May: -3.1%). 
  • In 1QFY17, loads to Europe averaged 71.9%, significantly lower than 1QFY16’s 74.8%. 
  • Meanwhile, SIA’s overall pax load factor fell 2.1ppt and 0.4ppt in June and 1QFY17 respectively.

Pax yields likely to remain weak in FY17; we lower our yield growth assumptions by 2ppt to -4.0% for FY17. 

  • Europe is an important market for SIA as it comprises a higher proportion of business travel. Any decline in travel to the region could have a disproportionate impact on overall yields. This could be exacerbated by the fact that local yields out of Singapore tend to be higher than overseas yields. 
  • In addition, the weak British pound and euro would have a net negative impact on SIA’s yields from the region if outbound travel out of Singapore slows down. 
  • Furthermore, SIA’s rival, Cathay Pacific, has warned its 1H16 yields were under intense pressure and thus we reckon SIA’s could also have weakened. 
  • Every additional 1% decline in yields from our base assumption of 11.1 S cents is expected to lead to about a S$96m decline in SIA’s PBT.

Discretionary travel already slowing down. 

  • SilkAir’s pax traffic was flat in June, compared with double-digit growth rates from Jan to May 16 and this could have reflected a slowdown in discretionary short-haul travel. SIA attributed this to a decline in pax carriage for the East Asia and Asia Pacific regions. 
  • In contrast, Scoot’s pax traffic rose 59.5% yoy in June, possibly cannibalising SilkAir’s traffic.



STOCK IMPACT

  • Earnings headwinds but stock price likely to be supported by dividend yield. Amid the global scurry for yields, we believe there will be continued investor interest in SIA due to its attractive FY17 dividend yield of 4.6%. 
  • We have reduced our FY17 DPS estimate by 16% to 51.4 S cents as we lower our core earnings estimates and assume that 50% of SIAEC’s divestment proceeds would be paid out as dividends.



EARNINGS REVISION/RISK

  • We lower our FY17 and FY18 core net profit estimates by 16% and 3% respectively as we factor in lower pax yields for SIA and reduce SilkAir’s pax traffic estimates. 
  • We now assume a 10% and 8% rise in SilkAir’s pax traffic for FY17 and FY18 respectively (16% and 6% previously).



VALUATION/RECOMMENDATION

  • Maintain HOLD but lower our target price to S$11.50 (from S$11.60) following our reduced earnings estimates. 
  • We continue to value SIA at 0.9x FY17F core book value ex- SIAEC. 
  • Our target price of S$11.50 implies a dividend yield of 4.5%. 
  • Preferred entry level at S$10.30, or 5% yield.



SHARE PRICE CATALYST

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




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-19
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.50 Down 11.60


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