SINGAPORE AIRLINES LTD
C6L.SI
Singapore Airlines - Good start further boosted by one-offs
- 1QFY17 net profit rises 181% y-o-y to S$257m.
- Core earnings improved due to lower fuel costs with one-off boosts.
- Portfolio strategy paying off as airline subsidiaries continue to post earnings growth.
Maintain BUY; beneficiary of low oil price with potential for higher dividends.
- We continue to like Singapore Airlines (SIA) as a beneficiary of the current low oil price environment.
- Furthermore, SIA has the potential to pay more dividends as earnings recover and supported by net cash of more than S$3bn.
Momentum from strong performances at Silkair and Scoot, and recovering Tigerair.
- While SIA’s flagship passenger business is facing tepid demand, its subsidiaries Scoot and Silkair experienced strong top- and bottom-line growth in FY16, which is slated to continue.
- Meanwhile, Tigerair’s earnings should also continue to rebound following its capacity curtailment.
- We project EBIT contribution from these three airlines to nearly double to S$260m by 2018F.
Fuel cost savings to be more substantial as expensive hedges expire and drive earnings recovery.
- As a group, SIA is projected to consume more than 40m barrels of jet fuel per year. With jet fuel currently at US$50 per barrel versus nearly US$120 per barrel at end-2014, the group will reap substantial benefits from lower fuel costs, especially as the more expensive hedges start to expire.
- We project SIA’s EBIT to continue its rebound from S$681m in FY16 (+66% y-o-y) to S$954m in FY17F and S$1,094m in FY18F, led by growth at its subsidiaries Silkair, Scoot and Tigerair, and lower fuel prices.
Valuation:
- Our S$12.60 target price is based on 1.1x FY17 P/BV, which is its historical mean and reflects SIA’s improved earnings and ROE outlook.
- With net cash of over S$3 per share, we see current valuation of 1x FY17 P/BV as an attractive entry level. The stock also offers a decent prospective yield of over 4.5%.
Key Risks to Our View:
- Competition and pressure on yields. There continues to be intense competition on long-haul routes, especially in the US and Europe segments, where the gulf carriers are aggressive. This leads to pressure on yields, and a larger than expected decline would impact negatively on SIA’s earnings.
Paul YONG CFA
DBS Vickers
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http://www.dbsvickers.com/
2016-08-02
DBS Vickers
SGX Stock
Analyst Report
12.60
Up
12.50
