SINGAPORE AIRLINES LTD
C6L.SI
Singapore Airlines (SIA SP) - Yield Headwinds Will Lower 1Q18 Profit
Brutal long-haul market
- Singapore Airlines (SIA) will report 1Q18 results on 27 Jul and we expect a profit of SGD96m, -8% YoY. We deem this as in line.
- The long-haul market is brutal; perhaps the worst since GFC and we cut our FY18-20F earnings by 40%, 39% and 17% to factor in the latest guidance on capacity growth, yield and fuel price assumptions.
- We roll over our base valuation year to FY18 and peg to its long-term historical mean of 0.93x P/BV. Our new fair value is SGD10.85. Maintain HOLD.
Good operating statistics
- Management deserves special praise for its impressive operating performance in 1Q18. Passenger traffic grew by 6.6% YoY and load factor spiked by 3.6ppt YoY to 80.2%. This is the best load factor performance since 2006.
- However, we believe this strong operating performance came at the expense of yields, especially in the long-haul segment which has seen significant fare undercutting from the Middle Eastern and China-based carriers.
Outlook remains uninspiring
- Competition in long-haul is particularly brutal due to the increased scrutiny in US-bound flights. This has caused demand to drop significantly and all the Middle Eastern carriers have reduced services to the US and redeployed the capacity to Asia. This means SIA’s long-haul flights have faced an extra layer of what was already an intense competitive market.
- Unless the situation quickly reverses back to normal in the US, we expect prolonged pressure for long-haul flights originating from Asia.
Trading close to its long-term P/BV mean
- Share price is trading at 0.87x FY18 P/BV, which is close to our fair value of SGD10.85.
- We don’t foresee any obvious catalyst to rerate the stock in the near term and hence maintain our HOLD call.
Operating statistics
- Best 1Q performance since 2006 Passengers carried grew by 6.6% YoY to 8.1m on the back of 2.4% growth YoY in total seats. This has pushed up the load factor up by 3.6ppt YoY to 80.2%. This is the best 1Q load factor performance since 2006.
- The cargo market was equally buoyant. Freight carried grew by 3.9% with a 3.7ppt higher YoY load factor of 65.7%. Industry demand has picked up since the beginning of 2017 underpinned by strong global manufacturing activities.
Earnings revisions
FY18 forecast: lower fuel price and yields
- We use management’s latest guidance on capacity deployment, which will shrink marginally stemming from the downsizing of the cargo business unit. Overall yields have been tweaked lower to reflect current industry trends. Our fuel-price assumptions have taken into account SIA’s latest fuel hedges.
- Based on these assumptions, we forecast a core net PATAMI of SGD404m (-17.1% YoY). This is 40% lower than our previous estimate of SGD672m.
- SGD has weakened against the USD and this has caused many USD-denominated costs to rise in SGD terms.
FY19F: lower fuel price and yields
- Again we use management’s latest guidance on capacity growth and use our latest house USD/SGD forex rate. We taper down our yield assumption to reflect the current weak yield environment.
- Our fuel-price assumptions have taken into account SIA’s latest fuel hedges. Based on these assumptions, we forecast a core net PATAMI of SGD443m (+9.5% YoY). This is 39% lower than our previous estimate of SGD725m.
FY20F: high fleet deployment to accelerate traffic growth
- We use management’s latest guidance on fleet deployment to ascertain capacity growth. We expect the high number of aircraft deployment to accelerate traffic growth to 3.0%.
- Our fuel-price assumptions have taken into account SIA’s latest fuel hedges. Based on these assumptions, we forecast a core net PATAMI of SGD474m (+7.0% YoY). This is 17% lower than our previous estimate of SGD571m.
Valuation and recommendation
Fair value of SGD10.85
- Share price has been trading close to one standard deviation below its P/BV mean for the past two years. We believe SIA should at least trade at its mean of 0.93x P/BV given that its business risks have significantly been reduced thanks to lower fuel prices, fuel hedges at attractive levels and management has significantly downsized the severely loss-making cargo business unit.
- Long-haul business unit is under pressure but we take comfort that the budget airlines and cargo business units are performing well.
- Based on 0.93x FY18 P/BV, we derive a fair value of SGD10.85. There is not much upside from the current share price and therefore maintain our neutral stance on the company.
Swing Factors
Upside
- Yield is the most important earnings driver, and the trend has been negative for the past three years.
- Low fuel price is providing significant cost reduction and bottom-line boost.
- Strong demand and supply scarcity in the region should drive up loads and yields in the medium term.
Downside
- Tigerair acquisition is costly and the market is keen to see how it extracts value to the group.
- FX volatility of SGD against destination countries and the USD will have an adverse effect on yields.
- Increased competitive pressure from the Middle Eastern carriers and regional peers who have upgraded their fleets and services.
Mohshin Aziz
Maybank Kim Eng
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http://www.maybank-ke.com.sg/
2017-07-26
Maybank Kim Eng
SGX Stock
Analyst Report
10.85
Up
9.700
