Singapore Airlines - OCBC Investment 2017-08-01: No Concrete Signs Of Clear Skies Yet

Singapore Airlines - OCBC Investment 2017-08-01: No Concrete Signs Of Clear Skies Yet SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - No Concrete Signs Of Clear Skies Yet

  • 1QFY18 lifted by cargo business.
  • One-off revenues amounted to S$173m.
  • Competition remains intense.

Core operating profit jumped 157% to S$108m.

  • Singapore Airlines’ (SIA) 1QFY18 revenue grew 5.6% YoY to S$3.86b, as increased passenger traffic (+7.6%) outstripped the decline in passenger yield (-3.1%). Parent airline recorded better performance on higher traffic despite the slight decline in yield. 
  • SIA Cargo posted a surprisingly positive quarter on higher freight carriage (+6.9%) and improvement in yield (+4.8%). However, SilkAir and Budget Aviation Holdings’ (BAH) (i.e. Scoot and Tigerair) operating profits came in lower YoY mainly due to significant capacity growth and weaker yields.
  • 1QFY18 operating expenses rose 3.4% YoY to S$3.58b, driven mainly by increase in net fuel costs (+3.4%) on higher average jet fuel prices, and ex-fuel costs (+3.4%) partly attributable to enlarged operations of SilkAir and BAH.
  • Consequently, SIA’s 1QFY18 reported PATMI fell 8.4% YoY to S$235.1m. However, excluding one-off adjustments from KrisFlyer programme (S$115m) and further recognition of compensation for changes in aircraft delivery slots (S$58m) recorded in 1QFY18 as well as one-off items recorded in 1QFY17, 1QFY18 core PATMI grew 69.7% YoY to S$62.1m.

No signs of competition easing in the near-term 

  • Looking ahead, we expect competition to remain intense with the Chinese carriers expanding capacity aggressively on the North-Asia and Transpacific routes and from the Gulf carriers’ persistent pressures on the Southwest Pacific routes. 
  • On the back of a seemingly improving global economic outlook that drives demand in passenger traffic, and coupled with support from premium economy, we are also forecasting a slowdown in decline in SIA’s passenger yields over the next two years.

Maintain HOLD 

  • While 1QFY18 core PATMI only formed 15.5% of our FY18 forecast, we expect SIA to turn in a better performance for the remaining quarters (due to seasonality effects). 
  • Factoring in the one-off items recorded in 1QFY18, we raise our FY18F PATMI by 42.7% (note that core PATMI forecast remains unchanged). 
  • Consequently, with no clear signs of a recovery in industry yields on the back of persistent competitive landscape, maintain HOLD on a higher Fair Value Estimate of S$10.10 (prev: S$10.03), based on 0.9x FY18F P/B.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-08-01
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 10.10 Up 10.030