Singapore Airlines - CIMB Research 2017-11-08: Favourable Cyclical Winds Lift SIA Group Earnings

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Favourable Cyclical Winds Lift SIA Group Earnings

SIA’s 1HFY18 core net profit of S$218m is around 5-10% higher than our/consensus’ previous FY18F forecasts, due to favourable dynamics for cargo and SIA mainline.
As a result, we lift our earnings forecasts and upgrade our target price to S$10.82, rolling over to end-CY18F, still based on a trough P/BV multiple of 0.9x.

We retain Hold, as the momentum behind the cyclical upswing may have peaked, oil prices are on the rise, and structural competition remains strong.
Hence we are expecting only modest earnings growth in FY19F after a strong FY18F.

SIA group’s core net profit of S$174m in 2QFY3/18 was more than double that of the previous year, with SIA mainline and SIA Cargo, in that order, driving the yoy change.
SilkAir and BAH (Scoot) saw slightly weaker profits, but were not significant enough to derail the positive momentum.
Total costs rose 3% yoy, in line with the 3% rise in ATK capacity, but behind the 5.4% rise in group revenue. Fuel costs dropped 1.7% yoy on lower fuel hedging losses, offsetting the rise in non-fuel costs like staff, handling, etc.

Across all SIA group’s passenger airlines, load factors rose due to strong demand, but yields dropped.
SIA mainline’s yields fell 2% yoy in 2QFY3/18, despite a better mix of premium pax and a return of business-related travel, likely due to competitive pricing by other airlines. This did not stop SIA mainline from booking in an EBIT of S$161m in 2QFY3/18, over double that of 2QFY3/17’s S$70m EBIT due to a large increase in ‘other incidental income’, which includes excess baggage charges and in-flight sales.

SilkAir’s yields fell due to double-digit capacity growth, which needed time for the market to absorb. The negative impact was buffered by a fall in its unit costs, as its fixed costs were spread over a larger base, and a rise in loads, hence its EBIT only fell by S$3m yoy.
BAH saw the same dynamics, but the yoy decline in its EBIT was a larger at S$6m yoy, as its late-Jun 2017 route launch to Athens may have been loss-making, in our view.

SIA Cargo experienced a positive S$37m yoy swing from losses to profits in 2QFY3/18, its fifth-consecutive quarter of yoy improvement, due to strong FTK demand, higher loads and higher yields.
The continued global PMI expansion and healthy new orders backlog by Asian exporters suggests that SIA Cargo should continue to do well in 2HFY18F.

SIA’s comment on its outlook is cautious: “Headwinds remain as competitors mount significant capacity in key markets. Yields continue to be under pressure, despite some stabilisation in recent months”, reflecting the underlying structural realities on the ground, in our view. Meanwhile, IATA noted in Sep’s Air Freight Market Analysis that cargo demand growth, while still strong, is likely to slow in the months ahead, hence 2018F FTK demand growth should slow down from the high single-digit pace expected for 2017F.

Brent crude oil prices have risen in recent weeks to close at US$64/bbl, against the 1HFY18 average of US$51/bbl, and may sustain at these levels given the potential for OPEC to extend its production cuts to end-2018F.
SIA hedged 41% of its 2HFY18F fuel requirements at around US$65/bbl of jet fuel, and cover for FY19F is at a maximum of 47% at average Brent prices of US$53-59/bbl. That leaves more than half of fuel requirements unhedged, and passthrough to passengers will typically be at a lag.
Upside risks include potential for stronger improvement in cyclical demand for premium-class seats as global economic growth continues.
Key downside risks include the rise in oil prices and stronger competition from other regional airlines.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2017-11-08

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 10.82 Up 10.420