Singapore Airlines - CIMB Research 2016-07-29: Core earnings continue to be under pressure

Singapore Airlines - CIMB Research 2016-07-29: Core earnings continue to be under pressure SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines - Core earnings continue to be under pressure

  • SIA reported 1Q17 core net loss of S$46m due to weaker demand and yield pressures, implying that our full-year core profit forecast may be 7% too high.
  • In addition to larger cargo losses, SIA Engineering also reported a small loss on the back of lower fleet management revenue and higher bonus provisions.
  • The near-term outlook continues to be murky and we downgrade our core EPS forecasts by 7% on lower demand and load factor assumptions for SIA mainline.
  • We maintain Hold but raise our target price to S$12.67 (still based on CY16 P/BV of 1.1x, average since 2001), after factoring in exceptional disposal gains. 

Highlights of 1Q17

  • The SIA group reported a core net loss in 1Q17 that was higher than the loss reported during last year’s 1Q on the back of much larger SIA Cargo losses and a dip into the red for SIAE. 
  • Although the group’s reported net profit almost tripled yoy to S$257m, it included S$151m in one-time recognition of ticket breakage revenue and a net S$141m gain from SIAE’s disposal of HAESL and special dividend from HAESL’s sale of SAESL.

No end to yield and demand pressures for SIA mainline

  • SIA mainline reported an operating profit for 1Q17 vs. a 1Q16 loss due to lower fuel costs but the numbers would have been much better without a decline in loads and the fifth consecutive quarterly yield decline. 
  • Official guidance for SIA mainline remained pessimistic, pointing to intense competition, aggressive capacity injection by rival airlines, geopolitical concerns in markets like France and Turkey and yield pressures.

SIA Cargo severely challenged

  • The cargo business reported its second consecutive quarter of relatively large losses, with a double-digit decline in yields more than offsetting any benefits enjoyed by low oil prices. With tepid global economic growth and overcapacity in the global airfreight markets, the challenges could last several more quarters.

SilkAir and Scoot continue to do well

  • SilkAir reported decent 1Q17 profits, with higher loads, higher capacity and lower unit costs more than offsetting the high single-digit yield declines. SilkAir is operating with more 737-8s and fewer A319/320s than last year, helping it to boost fleet efficiency. 
  • Scoot, meanwhile, reported its third-consecutive quarterly profit, albeit a very thin one. We still think this is an excellent performance as yields only declined in the low single- digits despite raising capacity 53% yoy during 1Q17.

A350s helping SIA build new connectivity

  • SIA has taken delivery of four A350-900 XWBs, which it uses to fly more economically to long and thin routes like Amsterdam and Johannesburg and to open up new secondary destinations like Dusseldorf. It will also use the plane to fly non-stop to San Francisco from October onwards, which will expand its offerings to the US and compete more effectively against one-stop services offered by rival North Asian carriers. However, these are longer-term, strategic initiatives, which may not yield immediate returns.

Raymond YAP CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-29
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 12.67 Up 12.42