Singapore Airlines (SIA SP) - UOB Kay Hian 2017-07-28: 1QFY18 Pace Of Pax Yield Decline Narrows But Sustainability In Question

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 1QFY18: Pace Of Pax Yield Decline Narrows But Sustainability In Question

Singapore Airlines (SIA) 1QFY18’s results contained several exceptionals:
1. S$115m in revisions on Krisflyer breakage rates, and
2. S$70m in slot compensation.
Excluding these, parent airline surprised with a 64% rise in core operating profit. Key positives are a lower-than-expected decline in parent airline yields and higher cargo yields.
Meanwhile, SIA’s pax yields are also likely to have benefitted from the stronger AUD and IDR yoy. We will seek further clarity at the analyst briefing.

Yields fell by just 1.9% in 1QFY18 vs a 4.7% decline in 4QFY17. Coupled with a 4.2pt improvement in load factor, parent airline’s core operating profit improved 64% to S$56m.
Also included in parent airline’s reported operating profit of S$241m were S$115m from a revision of Krisflyer breakage rate and S$70m in compensation for changes in aircraft delivery slots. We also believe that bellyhold revenue would have aided group profitability due to strong cargo yields.
SIA Cargo returned to profitability, but this was within expectation, although operating leverage from the S$57m increase in revenue was low, due to high handling charges and maintenance costs.
All these factors contributed to the better-than-expected earnings.

Given persistent concerns over excess capacity on the Kangaroo route and transpacific routes, we are positively surprised by the strength in the yields. It is unclear to what extent favourable currency movements aided pax yields. The AUD/SGD and IDR/SGD appreciated 3% and 2% yoy respectively during 1QFY18, and this would have aided yields.
A later Easter could also have aided yields somewhat.

This comes as a surprise given the relatively stable yields at parent airline. Meanwhile, Budget Aviation Holdings’ (BAH – Scoot and TigerAir) fell 1.7% yoy. This, along with higher unit costs, led to a 67% decline in operating profit for the budget carriers.

We reckon that the increase in fair value charges pertained to SIA long-term fuel hedges as Brent prices have declined qoq. Meanwhile, SIA had hedged 41.9% of its 2QFY18 fuel requirements at US$63/bbl (1QFY18: 39.3% at US$65/bbl). Excluding working capital changes, core operating cash flow (OCF) rose 19% yoy.
However, FCF ex-working capital changes would have remained in the red at a negative S$932m due to higher capex, which rose 60% yoy during the quarter.

Yield pricing dynamics are fluid and could change again if capacity is not well managed. The same goes for cargo operations, as a slowdown in US retail sales or the addition of freighter capacity could derail the improvement in yields.
Overall, we still expect SIA's cash flow to be relatively weak.
Some of the questions that we will be posing to management on 31 Jul 17 include:
1. The extent to which forex impacted yields and whether there is better capacity management by competitors - partly by the Chinese carriers.
2. The extent of deterioration in local currency yields.
3. The reasons behind SilkAir's steep decline in yields.
4. The sustainability of cargo recovery in coming quarters.

There is no change to our earnings estimates for now, but we will revise our estimates pending updates from the analyst briefing.

For now, we maintain our HOLD and target price of S$10.00. We will provide further updates after the analyst briefing.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-28

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