Singapore Airlines - CIMB Research 2017-02-09: Tempering the optimism generated by the 3Q results

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Tempering the optimism generated by the 3Q results

In the post-results analyst briefing yesterday, SIA tempered the optimism generated by the better-than-expected 3Q result by saying the competition remains very fierce.
Demand for air freight, which was almost single-handedly responsible for the 3Q outperformance, may have weakened in January, in our view.

We are expecting a 4QFY17F core net profit of S$102m only, vs. S$256m in the 3Q and also lower than the S$122m core profit achieved in 4QFY16.
Maintain Hold and target price based on trough CY17 P/BV of 0.9x.

At Wednesday’s analyst briefing, SIA warned that operating conditions remain very weak, with fare discounting required to drive passenger volumes.
Even with lower fares and no capacity growth, SIA’s passenger volumes have declined, a mark of excess capacity and too much competition, especially on the long-haul routes.
Demand on short-haul routes in SE and NE Asia remain strong, but yields have not been spared.

SIA’s fares continue to include fuel surcharges, which are already more than the all-in fares charged by some airlines in several very competitive markets. This has required SIA to cut its base fares to zero. However, its systems do not allow it to price in negative base fares, which would have been ideal in those circumstances, constraining its ability to respond to competitors.
But already, SIA’s pricing on economy class is approaching LCC levels, cascading down the price pressures to its own LCC subsidiaries.

SIA’s focus is profitability, and the mainline carrier has willingly ceded market share to its regional and global peers, especially at the back-end of the plane.
Premium economy (PEY) was introduced since Aug 2015, reducing the number of economy class seats and permitting SIA to tap demand for higher-value products. PEY will be fully installed on all of its long-haul planes by end-CY17F.
New first and business class products will be launched soon, and a new aircraft order for 777 and 787 planes was placed today.

We believe that SIA should eventually move to install 10-abreast economy class seating, from 9-abreast now, as the former has already become the industry standard across the globe. While passenger comfort will be compromised, it will allow SIA to reduce the unit cost of each economy class seat, allow SIA to price more competitively and wrest back market share.
Economy class passengers are unlikely to want to pay a premium to SIA for 9-abreast, as they are typically very price sensitive, and have many low-cost options.

SIA recently hedged 33-39% of its fuel needs for the next six years to 2022 at Brent prices of US$53-59/bbl.
Typically, SIA enters into hedges for two years forward, so this is an opportunistic move to lock in historically-low fuel prices.
We view this positively, as the group’s risk profile has been reduced at a reasonable price. The notional value of this hedge is US$5bn, and only a strong airline like SIA would have the balance sheet to do it, separating SIA from its peers with weaker balance sheets.

After a strong Dec, the Jan performance of SIA Cargo may have taken a dip, with the Lunar New Year effect largely absent.
Scoot may see losses from start-up routes when it launches to Athens in Jun, and to other new European destinations later on.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2017-02-09

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 10.500 Same 10.500