Singapore Airlines - CIMB Research 2017-02-08: Cargo gives quarterly earnings a big lift

Singapore Airlines - CIMB Research 2017-02-08: Cargo gives quarterly earnings a big lift SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Cargo gives quarterly earnings a big lift

  • SIA reported a core net profit of S$256m in 3QFY3/17, putting it on track to deliver full-year results of more than 10% above our previous expectations.
  • The main upside surprise was the robust profits of SIA Cargo, lifted by a seasonal surge in US/EU demand, leading us to upgrade FY17F core EPS by 13%.
  • We believe FY18F will be more challenging in view of higher oil prices and strong competition in the passenger business.
  • Maintain Hold, with a higher target price (S$10.50), still based on CY17 trough P/BV of 0.9x.

Highlights of 3QFY17 

  • SIA’s quarterly reported net profit of S$177m was 36% lower yoy, due to a S$79m impairment on the value of the Tigerair brand, but excluding that, core earnings were 12% higher yoy. This snapped two consecutive quarters of weaker yoy results, which were caused by falling passenger yields and load factors more than offsetting lower fuel prices. 
  • While the passenger business continued to be buffeted by headwinds during the 3Q, the cargo business benefitted from the sharp increase in seasonal demand.

Headwinds push against the full-service business 

  • The full-service business continued the trend of weaker yoy earnings for the second consecutive quarter. 
  • Yields and load factors at SIA mainline and SilkAir continued to fall yoy, more than offsetting cheaper fuel costs. 
  • Amidst tepid global economic growth and slower business travel demand, competitors’ long-haul capacity additions led to weaker pricing. SilkAir has had a strong run in profits, but after expanding capacity by 80% over the past five years, additional headroom for growth may be limited in the near term.

Low-cost business holding up for now, but stresses are showing 

  • Scoot has delivered stronger yoy earnings for at least the past two years, as the delivery of its B787s led to aggressive cost-efficient expansion, coinciding with low oil prices and the decommissioning of aged 777-200s. 
  • However, for the first time ever, Scoot’s 3Q RASK* fell by more than its CASK*, burdened as it were by 50% yoy ASK expansion over the past four quarters, by promotional fares necessitated by its recent entry into India (Chennai, Amritsar, Jaipur) and by the negative impact of demonetisation in India.

Cargo business doing well, but duration of tailwind uncertain 

  • SIA Cargo delivered a S$53m EBIT in 3QFY17, against just S$2m in the previous year. This reversed four consecutive quarters of deteriorating performance. 
  • According to IATA, air freight demand was strong in Nov between Asia and Europe and on the transpacific, which had been reflected in Nov and Dec cargo data at both SIA and Cathay Pacific. Demand for ocean freight was also robust during 4QCY16. The strength may be related to restocking for the early Lunar New Year in 2017, and may not last.

SIA continues its long-term structural initiatives… 

  • Despite the near-term challenges, SIA continues to invest in lounge refurbishment, and will complete the installation of premium economy seats on all of its 777-300ER planes by 2017F. It will soon unveil a new premium product for the five A380s delivering in 2017F-18F. 
  • With direct SFO flights in place since Oct using new A350-900s, SIA is preparing to relaunch direct flights to the US when the ultra-long-range version delivers in 2018F. 
  • Finally, the Scoot-Tigerair brand merger should be completed this year.

…but needs a global macro recovery to work some magic 

  • These far-sighted initiatives keep SIA competitive against its peers, but the road ahead is tough. Only a major global recovery can lift earnings from current depressed levels.

*ASK: Available seat kilometres
*RASK: Revenue Per ASK
*CASK: Cost Per ASK

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2017-02-08
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 10.500 Up 10.470