Singapore Airlines - DBS Research 2016-11-07: Just holding on

Singapore Airlines - DBS Vickers 2016-11-07: Just holding on SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Just holding on

  • 2Q17 results below expectations on weaker than expected demand and yields, and higher than expected operating costs.
  • FY17F/18F forecasts cut by 19%/28%.
  • Downgrade to HOLD, TP S$10.20 (0.9x P/B) as near term outlook remains patchy.

Downgrade to HOLD; patchy outlook for the next few quarters.

  • We turn more cautious on Singapore Airlines (SIA) following a tepid set of results and amid a continued weak demand environment. 
  • We see weaker yields and higher operating costs eroding most or all the net fuel cost savings in the next few quarters ahead. 
  • We have cut our FY17F/18F earnings by 19%/28% and now project fairly flattish core EBIT growth ahead for SIA. 
  • We have also lowered our DPS projection by 20% to 40Scts p.a. following a cut in interim dividend to 9Scts in 1HFY17 despite an increase in earnings.

A largely disappointing 2Q. 

  • SIA’s core EBIT declined 15% y-o-y to S$109m in the quarter ending September, as revenue declined 5% to S$3.65bn. Fuel costs were lower by 22% y-o-y, or S$265m, but this was more than offset by non-fuel costs rising by 9% ($90m) and a $195m drop in revenue. 
  • Segmental EBIT was worse for 
    1. SIA’s flagship passenger segment, 
    2. Silkair, 
    3. SIA Cargo and 
    4. SIA Engineering; while Scoot and Tigerair reported turnarounds into modest profits. 
  • Lower dividends from investments (-S$88m), aircraft impairments (- S$21m) and weaker associate income (-S$18m) led to a 70% yo-y drop in 2Q17 net earnings to S$65m for SIA.

Weak demand, lower yields and higher non-fuel costs ate into fuel cost savings. 

  • While SIA has enjoyed lower fuel costs in the last few quarters (S$265m in 2Q17; S$357m in 1Q17 etc), lower revenue as a result of lower yields (for both the core SIA passenger and cargo segments) and higher non-fuel costs such as MRO (maintenance, repair and overhaul) and staff costs have eaten into these savings. 
  • Amid a continued weak demand environment and sustained non-fuel cost pressures, we see the outlook for SIA’s operating earnings to be sluggish over the next few quarters.


  • Our S$10.20 target price is based on 0.9x FY17 P/BV, which is at c. -1 SD its historical mean and reflects the sluggish outlook for SIA with prospective core ROE of just 5.2%. 
  • Meanwhile, downside risk should be limited by the 4% dividend yield on offer.

Key Risks to Our View

  • Higher oil prices a threat going into 2017. With oil prices having moved off its lows, and with OPEC seemingly moving to shore up prices, a substantial spike in jet fuel prices would negatively impact SIA’s profitability.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-11-07
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 10.20 Down 12.600