Singapore Airlines - CIMB Research 2017-05-19: Facing Risk From Higher Oil Prices

Singapore Airlines - CIMB Research 2017-05-19: Facing Risk From Higher Oil Prices SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Facing Risk From Higher Oil Prices

  • SIA’s 4QFY17 group core net profit of only S$22m was 80% below our forecast, putting the full year at 20% below, mainly on account of lower-than-expected yields.
  • SIA guidance is that yields remain under significant pressure, which is troublesome if oil prices rise as SIA may not be able to pass the higher costs to passengers.
  • With a 9% rise in its share price over the past three months, we think it is time to take profit on SIA. Downgrade from Hold to Reduce and cut forecasts by 11-16%.
  • Our target price is lowered to S$10, still at its trough P/BV of 0.9x, due to EPS cuts.

Highlights of 4QFY17 and FY17 

  • SIA delivered a disappointing set of earnings in the 4Q, with the SIA mainline suffering its most significant quarterly loss since the quarter ending Mar 2014. 
  • Fuel costs were up only slightly as the reduction in SIA’s fuel hedging losses largely offset the 51% yoy rise in 4Q spot jet fuel prices. The problem was at the yield front, with both SIA mainline and SilkAir delivering mid single-digit yoy yield declines for reasons that are well known: poor business travel demand and competition with the Gulf and Chinese carriers.

Reported net loss due to competition-related fines for cargo 

  • The 4Q reported net loss of S$138m was due to the S$132m provision by SIA Cargo for competition-related fines, which was reported earlier but not in our previous forecasts.
  • For the full year, other exceptional items include the S$151m recognition of ticket breakage income and S$141m gain on sale of HAESL.

Budget Aviation Holdings (BAH) under margin pressure 

  • For the first time, the Scoot and Tigerair numbers have been aggregated into a combined BAH disclosure. BAH saw its full year FY17 operating profit rise 61% yoy but the 4QFY17 EBIT halved to S$22m. The reason was the continuing high single-digit pressure on yields and RASK due to load factors not keeping up with more than 20% yoy capacity expansion. 
  • Also, the yoy CASK reductions have slowed down significantly as the cost base is already low with the 787s already operating for more than two years.

Cargo improvement due to cost savings 

  • On the bright side, SIA Cargo reported an EBIT profit of S$3m for the whole year, in contrast to the S$50m EBIT loss in FY16. This was due to judicious deployment of freighter capacity so load factors did see low single-digit improvement but also because it returned two leased 747Fs in 2HFY17, helping save operating lease rentals. 
  • Cargo yields, however, are still falling, which is a sign of persistent overcapacity.

Spot fuel prices could head higher in next 12 months 

  • Saudi Arabia and Russia recently agreed to extend oil production cuts until 1QCY18. There is a possibility that the cuts may even be extended until 4QCY18, in our view.
  • While jet fuel prices are currently only US$60/bbl, we think average FY18F prices could reach the US$70/bbl assumption that we have used in our model. 
  • After netting off expected fuel hedging gains, we forecast that SIA will pay an all-in jet fuel price of US$72/bbl in FY18F, up from US$70/bbl in FY17, which is unhelpful.

Fuel hedging will provide some protection 

  • The all-in jet fuel cost would have been greater if SIA had not taken a huge amount of hedges earlier this year. 
  • For FY18F, SIA is 41% hedged at an estimated average jet fuel price of US$65/bbl (comprising 21% jet fuel hedge at US$66 and 20% Brent hedge at US$53). 
  • SIA is further protected by 40-45% Brent hedges extending until CY22F at prices in the range of US$53-59/bbl.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2017-05-19
CIMB Research SGX Stock Analyst Report Reduce Downgrade HOLD 10.000 Down 10.500