SINGAPORE AIRLINES LTD
C6L.SI
Singapore Airlines (SIA SP) - Warning bells are ringing
Rising competition in the long-haul segment
- SIA’s 2QFY17 was well below our forecast by half, which already was the lowest on the Street.
- Yields tumbled, load factor dipped and contributions from associates plummeted. Things are not looking good going forward either.
- We maintain unchanged our earnings forecasts, HOLD rating and TP of SGD9.70 (pegged to its long-term P/BV mean of 0.86x) pending the analyst briefing later today.
Nothing seems to work!
- 2QFY17 core earnings of SGD88m (-58% YoY, -15.5% QoQ) was below ours and consensus expectation. The 1HFY17 core earnings make up only 29% of our full-year FY17 forecast and the outlook statement by management hardly provides comfort.
- The key pressures are rising competition in the long-haul market and increasingly budget conscious customers.
Management needs to have a hard look
- We are concerned over the long-term outlook for the group.
- The parent airline is on a secular decline, the flight network is shrinking, and so is the yield.
- Only the budget carriers, namely Scoot and Tigerair, are holding up well and show some signs of long-term growth. Otherwise, the business is shrinking and management might have to rethink its growth plans going forward.
Nothing to be upbeat about
- We don’t see any positive investment case for SIA in the short term horizon as the supply-demand balance is not favourable and it is struggling with competition. However, it is trading close to its floor valuation of 0.86x, indicating the risks have been largely priced in.
- Maintain HOLD.
Swing Factors
Upside
- Yield is the most important earnings driver, and the trend has been negative for the past three years.
- Low fuel price is providing significant cost reduction and bottom line boost.
- Strong demand and supply scarcity in the region should drive up loads and yields in the medium term.
Downside
- Tigerair acquisition is costly and the market is keen to see how it extracts value to the Group.
- FX volatility of SGD against destination countries and the USD will have an adverse effect on yields.
- Increased competitive pressure from the Middle Eastern carriers and also from regional peers who have upgraded their fleets and services.
Mohshin Aziz
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2016-11-04
Maybank Kim Eng
SGX Stock
Analyst Report
9.700
Same
9.700
