Singapore Airlines - CIMB Research 2017-07-28: 1QFY18 Cargo Recovery Drives Yoy Improvement

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - 1QFY18 Cargo Recovery Drives Yoy Improvement

An extrapolation of SIA’s 1QFY18 core net profit implies that it may outperform our full-year forecast by one-third, mainly driven by the cargo division’s return to profits.
However, we have not changed our forecasts as global airfreight tailwinds may have reached a peak and cargo earnings may weaken in future quarters.

Meanwhile, pax yields fell yoy and, while the mainline carrier delivered better yoy EBIT, it was more than offset by lower EBIT at both SilkAir and BAH.
We maintain our Reduce call and our target price (S$10.00), based on its trough P/BV of 0.9x.

The 1QFY18 core net profit of S$43m recovered from 1QFY17’s core net loss of S$23m and was in line as subsequent quarters could be weaker.
The cargo biz flipped from a loss of S$34m to a profit of S$6m while associate losses narrowed from S$48m to just S$1m.
SIA mainline profits rose from S$34m to S$56m but this was more than offset by a yoy fall in SilkAir’s profits from S$27m to S$7m and in BAH’s profit from S$9m to S$3m. Hence, the overall passenger airline business actually saw profits dip by S$4m yoy.

The reported net profit for 1QFY18 fell to S$235m from S$257m the year before on account of lower exceptional profits of S$192m from S$279m last year.
During 1QFY17, the group booked S$141m gains from the HAESL disposal (partially offset by a related S$23m extra staff bonus), S$151m from ticket breakage gains and S$12m from aircraft delivery delay compensation.
But for 1QFY18, a lower S$115m in gains from revisions to ticket breakage provisions were booked, plus S$70m compensation from delivery delays.

The yoy recovery in SIA mainline’s EBIT profits was due to higher income from other sources not related to the underlying base fare. These include fees charged for booking, cancellation and excess baggage. The fare revenue itself was non-compensatory; while loads rose 4.2% pts to 80%, it could not offset the 1.9% yoy fall in yields and a 3.8% yoy rise in CASK. Unit costs for handling charges and maintenance rose around 10% yoy.
While spot fuel prices rose, hedging losses fell, hence unit fuel costs rose only 1% yoy.

Easter moved from 27 Mar 2016 (4QFY16) to 16 Apr 2017 (1QFY18), which explained why loads rose yoy and why SIA mainline’s yields ‘only’ declined 1.9% yoy (compared to around 5% yoy decline in the preceding two quarters).
This seasonal effect will not recur, hence the yoy comparisons may not be so favourable in future quarters.

SilkAir and BAH both saw yoy yield declines more than offsetting load improvements, leading to lower yoy RASK.
At the same time, CASK rose yoy, leading to a pincer-like squeeze on profits. Against the immediately preceding Jan-Mar 2017 quarter, the Apr-Jun quarter saw yields decline sequentially, leading to a large qoq fall in profits. This may be due to rising competitive pressures and these two airlines’ own double-digit ASK growth, which may necessitate pricing discounts.

The cargo recovery was driven by the tailwind of global restocking and rising PMI new export orders indices. Hanjin Shipping’s bankruptcy on 31 Aug 2016 benefitted both air cargo operators and container shipping companies.
However, the cargo business is notoriously cyclical and IATA suggested in its May 2017 airfreight report that the cyclical growth peak may have passed, which may lead to lower cargo volumes and profits in the quarters ahead.
Upside risks include a fall in oil prices and recovery in business travel.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2017-07-28

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