Singapore Airlines (SIA SP) - UOB Kay Hian 2017-03-17: Strong Pax Loads Hold Scope For A Better 4QFY17

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Strong Pax Loads Hold Scope For A Better 4QFY17

SIA’s pax load factor rose 2ppt yoy in Jan-Feb 17 while cargo loads also improved. This holds scope for a strong 4QFY17 and potential upward earnings revision, especially if the improvement in loads continues into March.
In addition, we believe the odds of pax yields declining substantially from current levels are low. Should pax yields stabilise in 4QFY17, the stock will likely be re-rated upwards.

We note that there was broad-based improvement in pax loads across all regions except Southwest Pacific in Jan-Feb 17.
The region accounts for 22% of Singapore Airlines’ (SIA) seat capacity in km-terms and part of the decline in loads could be due to directional imbalance between inbound and outbound travel. The latter is typically stronger.
Still, the 2ppt yoy improvement holds scope for a strong 4Q. Every 1ppt point improvement in loads factors above breakeven levels leads to about S$30m in operating profit. Breakeven load factor in 3QFY17 was 77.9%.

The strong load factors for Americas and Europe during the period could suggest higher premium traffic. This, in turn, could potentially lead to stronger premium yields. In February, loads to Europe rose 5ppt yoy. Prior to that, SIA’s loads to Europe had declined throughout FY17 except for December.
SilkAir’s loads rose 1.4ppt yoy, driven by double-digit traffic growth. This was led by stronger loads in West Asia. SilkAir’s Jan-Feb loads of 73.1% were also substantially higher than 3Q’s 71.3%. Should the trend of strong pax loads continue into March, the carrier will likely register higher profits qoq.
Cargo loads also improved during the period on the back of modest cargo traffic growth and good capacity management. The stronger cargo loads was led by the East Asia and Americas sectors. In Feb, SIA’s cargo loads also rose 2.4ppt, which SIA attributed to a reduction in freighter capacity. The higher cargo loads will likely lead to lower yoy cargo losses for 4QFY17.

Over the next six months, we believe that the odds of positive surprises are higher than negative surprises due to:
1. potential diversionary Chinese traffic from South Korea,
2. improving cargo loads, and
3. recovering pax yields.

December’s yoy pax yield differential was the lowest in six months. We believe the odds of pax yields declining substantially from current levels are low.
Our target price of S$10.40 is based on 0.7x FY18F P/B ex-SIAEC, lower than CX’s 0.8x P/B (293 HK/SELL/Target: HK$10.50).
Should pax yields stabilise in 4QFY17, we believe the stock will likely be re-rated upwards.

Maintain HOLD and target price of S$10.40. We continue to value SIA at 0.7x FY18F core book value ex-SIAEC, or 1SD below mean P/B.
Suggested entry price is S$9.90.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-17

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.400 Same 10.400