Singapore Airlines (SIA SP) - UOB Kay Hian 2017-09-19: August’s Load Factor Continues To Improve, But At The Slowest Pace Since April

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-09-19: August’s Load Factor Continues To Improve, But At The Slowest Pace Since April SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - August’s Load Factor Continues To Improve, But At The Slowest Pace Since April

  • While Singapore Airlines (SIA)’s load factors continued to improve for the financial year, August’s 0.3ppt was the lowest since the start of FY18. 
  • Notably, SIA had cut capacity to Europe and the Americas and this aided load factor. 
  • We are also mindful of further pressure on loads or yields amid recurring terror attacks and increasing competition. 
  • Maintain HOLD. Target price: S$10.10. Entry price: S$9.50 or lower.



WHAT’S NEW


Load factor continues to show yoy improvement, but August’s increase is at the slowest pace for the financial year. 

  • Restructuring of the Americas’ network, downward capacity adjustments out of Europe, and strong demand out of Asia led to improved load factors, albeit at the slowest pace for FY18. 
  • Similarly, SIA’s pax traffic growth at 0.8% yoy increase was the slowest for FY18. Ytd, pax traffic has risen by 3.1% yoy vs our expectation of 2.5% for the year.

European load factors have improved despite terror attacks, as SIA has cut capacity. 

  • SIA’s European load factor has increased since Apr 17, averaging an increase of 6.6ppt. In Aug 17, load factors to the region rose by 3.1ppt. SIA has been cutting seat capacity to Western Europe since June, and also reduced seat capacity by 4% in August. We believe this is a prudent measure.
  • A key concern though is whether the improvement in load factor would have arisen at the expense of yields. Meanwhile, the entrance of low-cost long-haul carrier Norwegian Air in September could pressure loads and yields on the European leg In the previous quarter, Norwegian’s RASK (pax revenue/ASK) in US$-terms was 25% lower than SIA’s.

Cargo traffic continues to grow but load factors are lower than 1QFY18’s. 

  • In the previous quarter, SIA Cargo registered a S$5.1m profit vs a S$34m loss as cargo yields rose 4.8%. Cargo load factors for June and Jul 17 are 2.3ppt lower than 1Q18 and this suggests that cargo operations are less likely to be an earnings driver.


STOCK IMPACT

  • We are neutral and will be sellers closer to S$10.50. The stock price had risen post results amid expectation of yield recovery and we believe that the street is looking at 1-3% improvement in yields for FY18. This might not materialise, given concerns over repeated terror attacks in Europe and with increased competition from a long-haul low-cost carrier.
  • Our preferred pick in the Singapore aviation space is SATS, (BUY, Target S$5.40)


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION

  • We maintain our target price of S$10.10, valuing core airline operations at 0.7x book FY18F value, based on an estimated 2.4% Ex-EI, ROE.


SHARE PRICE CATALYST

  • Capacity cuts across the industry and higher yields.




K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2017-09-19
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100



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