Singapore Airlines - OCBC Investment 2016-09-23: Headwinds just got stronger

Singapore Airlines - OCBC Investment 2016-09-23: Headwinds just got stronger SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Headwinds just got stronger

  • Steep decline in Aug PLF.
  • Weak yields to persist.
  • Maintain HOLD on lower FV.

Fall in PLF across all regions on weaker demand 

  • Singapore Airlines’ (SIA) Aug 16 operating results saw passenger capacity growth outpace passenger traffic growth across all its passenger airlines. 
  • Overall passenger load factor (PLF) for Aug 16 fell 5.2ppt YoY to 79.7% as capacity grew 3.6% while passenger traffic declined 2.9%. 
  • For the parent airline, passenger traffic posted a steep decline of 6.8% YoY on softer demand across all regions against a 0.3% decrease in capacity, resulting in 5.6ppt fall in PLF to 80.0%, the lowest for the month of Aug since 2012. 
  • SilkAir’s numbers were disappointing as traffic decreased 2.0% YoY against a 5.3% expansion in capacity, which led to a 5.2ppt drop in PLF to 71.0%. 
  • For Scoot, capacity growth of 61.8% YoY outpaced traffic growth of 52.8%, resulting in a 4.8ppt fall in PLF to 80.4%. 
  • SIA Cargo, however, was the only one that posted positive growth in PLF as demand outpaced capacity changes, across all regions except for West Asia and Africa. That said, we believe SIA Cargo sacrificed cargo yield for PLF growth.

Pressure on two fronts 

  • In our view, SIA’s Aug 16 operating results showed indications of weakening demand amid intensifying competitive environment. Coupled with competition from the Gulf and Chinese carriers, we believe passenger yields will continue to be under pressure in the near to medium term. 
  • Furthermore, we think SIA’s Aug 16 operating results have yet to register any possible impact from rise in Zika virus cases in Singapore, which only made news in late-Aug. 
  • Note that numerous countries (e.g. Australia, U.K. etc.) that SIA has strong presence in have also issued travel warnings on Singapore.

Lower FV of S$10.80 

  • As we adjust for weaker yields outlook, we cut our FY17F/18F EPS by 9.7%/12.7%, respectively. 
  • Maintain HOLD, as we decrease our FV from S$11.56 to S$10.80, based on 0.9x FY17F P/B (- 0.75SD 9-year mean).

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-09-23
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 10.80 Down 11.560