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
- SIA’s flagship passenger segment,
- Silkair,
- SIA Cargo and
- 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.
Valuation
- 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
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http://www.dbsvickers.com/
2016-11-07
DBS Vickers
SGX Stock
Analyst Report
10.20
Down
12.600
