Singapore Airlines - DBS Research 2017-05-22: Persistent Headwinds

Singapore Airlines - DBS Vickers 2017-05-22: Persistent Headwinds SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Persistent Headwinds

  • FY17 net profit of S$360m below expectations as 4Q moved into a loss of S$138m.
  • Near-term earnings outlook cloudy as yields remain soft on stiff competition.
  • Efforts to augment revenue and manage costs will take time to materialise.
  • Maintain HOLD, TP S$10.10.

Maintain HOLD; soft yields amidst stiff competition remain a challenge. 

  • We remain neutral on Singapore Airlines (SIA) as its core earnings outlook remains patchy amid stiff competition and soft yields. 
  • With oil prices having moved off the bottom but yields remaining soft, we project overall EBIT to decline 15% yo-y in FY18F but net profit to improve 23% to S$445m – assuming no non-operating charges for FY18F. This represents a projected ROE of 3.4%, which is below SIA’s cost of capital. 

4Q17 and FY17 numbers hit by weaker yields and nonoperating items. 

  • Passenger yields for SIA’s flagship business fell by 3.8%/4.7% in 4Q17/FY17, which led to weaker operating earnings for the segment and SIA Group in both 4Q and for the full year. 
  • Meanwhile, SIA also incurred non-operating charges such as SIA’s cargo provision for a fine (S$132m), write-down of Tigerair-related brand and trademarks (S$98m) and a loss on disposal of aircraft, spares and spare engines (S$52m), which were a further drag on the group’s bottom line.

Business review could lead to longer-term profitability but nearterm outlook remains tepid. 

  • SIA announced that it has set up a dedicated Transformation Office to conduct a wide-ranging business review aimed at raising the group’s revenues while improving its cost base. 
  • While this may pay off in the longer term, we remain cautious on the near-term earnings outlook for SIA as its flagship passenger business continues to face stiff competition and soft yields, leading to lower profitability.


  • Our S$10.10 target price is based on 0.9x FY18 P/BV, which is at c. -1SD its historical mean and reflects the sluggish outlook for SIA with prospective core ROE of just 3.4%.

Key Risks to Our View

  • Vulnerable to demand shocks and/or fuel price increase. With operating margins razor thin, SIA is vulnerable to any demand shock and/or an increase in fuel prices.


4Q disappoints with a loss of S$138m, dragging full-year net profit to decline 55% y-o-y to S$360m 

  • SIA reported full-year net profit of S$360.4m (versus our forecast of S$674m), which is 55% lower y-o-y, mainly due to weak yields continuing to pressure margins and a number of unfavourable non-operating items.
  • The group’s top line fell by 2.4% y-o-y to S$14,869m despite a 2.6% y-o-y improvement in overall passenger carriage as yields fell across all the various passenger segments.
  • Meanwhile, higher non-fuel operating costs largely offset the savings in fuel, leading to an 8.6% y-o-y decline in EBIT to S$623m (vs our forecast of S$737m). The miss was mainly due to yields being lower than expected.
  • SIA recorded a loss of S$138m in 4QFY17 vs a profit of S$224.7m a year ago due to both lower EBIT (S$27.6m vs S$153.2m) and a S$148.7m charge in non-operating items vs a gain of S$93.6m a year ago. Segmentally for FY17, SIA’s core passenger business recorded an EBIT of S$386m vs S$485m a year ago, SilkAir’s EBIT grew to S$101m from S$91m, Budget Aviation (Scoot + Tigerair)’s EBIT grew to S$67m from S$42m while SIA Cargo saw narrower losses of S$5m from S$40m a year ago. SIA Engineering’s contribution was lower at S$72m vs S$104m last year.
  • Below the EBIT line, SIA recorded a loss on disposal of aircraft and spares of S$31.7m vs a gain of S$52.7m a year ago, and received lower dividends from long-term assets and assets held for sale of S$45m vs S$115.3m a year ago. Additionally, other non-operating items was –S$103.2m (mainly due to the re-imposition of a fine on SIA Cargo by the EU) vs a gain of S$91.1m a year ago. Meanwhile, share of associate losses grew from S$11.1m to S$63m. As a result, earnings fell 55% y-o-y to S$360m. A final dividend of 11 Scts was declared, bringing full-year dividend to 20 Scts, versus 45 Scts a year ago. This works out to be a payout ratio of 66% for both years. Net cash declined to c. S$2.1bn as at end FY17F from S$3.1bn as SIA took delivery of more planes funded by its own cash.
  • Lowering FY18/19 net profit estimates by 35%. Factoring in lower yield assumptions, mainly for SIA’s flagship passenger business, we lower our net profit estimates for the group by 35% over the next two years to S$445m for FY18 and S$453m for FY19.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-05-22
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100