Singapore Airlines - DBS Research 2016-08-02: Good start further boosted by one-offs

Singapore Airlines - DBS Research 2016-08-02: Good start further boosted by one-offs 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 | http://www.dbsvickers.com/ 2016-08-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 12.60 Up 12.50


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