Singapore Airlines - CIMB Research 2016-11-04: Sliding towards another year of modest profits

Singapore Airlines - CIMB Research 2016-11-04: Sliding towards another year of modest profits SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Sliding towards another year of modest profits

  • SIA reported 1HFY3/17 core net profit of S$33.7m, down 59% yoy, and about 30% below expectations on escalating yield pressures and falling passenger load factors.
  • Despite low oil prices and a halving of fuel hedging losses, SIA has not been able to keep the cost savings due to heavy competition which required a price response.
  • We maintain Hold, but downgrade the target price (S$10.47) based on a trough P/BV of 0.9x, from our previous multiple of 1.1x that was the average since 2001. 
  • We also cut earnings by 27-32% across all forecast years.

Highlights of 2QFY17 (July-September 2016) 

  • SIA group delivered core profit of S$79.4m during the 2Q, 26% lower yoy despite spot oil prices declining 16% and fuel hedging losses declining 52% yoy. 
  • With the exception of yoy improvements seen in the operating profit of Scoot and Tigerair, the earnings of SIA mainline, SilkAir and SIA Cargo all weakened, as yields and passenger load factors (PLF) all came under pressure, continuing a trend seen over the past 18 months.

Pressures on SIA mainline mounting 

  • SIA mainline saw its core EBIT decline 19% yoy to S$70.4m during 2Q17. Even though it offered a lower yoy yield, it could not avoid a large decline in its PLF, resulting in a material RASK decline that exceeded the unit cost savings from cheaper fuel. 
  • Guidance continued to be pessimistic, with SIA pointing to persistent “excess capacity and aggressive pricing” in the market, “exerting pressure on loads and yields”.

SilkAir flying into the headwinds too 

  • SilkAir had delivered seven consecutive quarters of improved yoy results, but the outperformance finally faded in 2Q17 when its EBIT fell 19% yoy to S$17m. 
  • SilkAir’s earlier impressive run was powered by generally rising loads, unit cost improvements that came from the gradual reduction in its legacy A319/320 fleet, delivery of new 738s, and capacity expansion which spread out fixed costs over a wider base. But SilkAir’s PLF fell in 2Q17, on top of lower yields, as it was also affected by competition.

Scoot did better yoy 

  • Scoot delivered a S$5m operating profit in 2Q17 against a S$2m loss in the previous year. This was at least the sixth quarter of better yoy performance, and the performance was impressive considering that it grew ASK capacity by more than 50% yoy (due to 12 aircraft vs. eight last year). 
  • Although Scoot saw its first ever PLF drop of 3.2% pts in many quarters, and a 7.4% fall in yields, unit costs declined by more than RASK as the 787s did their trick, so Scoot continued to perform well for now.

Tigerair continued delivering profits 

  • Meanwhile, Tigerair delivered its fourth consecutive quarterly profit after rationalising capacity in the previous two years. This time last year, SIA launched its bid to privatise Tiger Airways, and SIA pointed out that the integration between Scoot and Tigerair continues to provide cost efficiencies and opportunities to enhance network connectivity.
  • We expect to hear more about this at this morning’s analyst briefing.

SIA Cargo in the doldrums 

  • SIA Cargo continued to make losses during 2Q17; the last time SIA Cargo made good profits was in 2010, when global restocking in the aftermath of the Global Financial Crisis caused demand and freight rates to perform excellently. 
  • Since then, it has been a long slide down, and SIA Cargo has not been able to escape the cold winter.

Raymond YAP CFA CIMB Research | 2016-11-04
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 10.47 Down 12.670