Singapore Airlines - OCBC Investment 2017-11-09: Parent Airline And Cargo Lift Earnings

Singapore Airlines - OCBC Investment 2017-11-09: Parent Airline And Cargo Lift Earnings SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Parent Airline And Cargo Lift Earnings

  • Core 1HFY18 above expectations.
  • Traffic growth outpaced yield decline.
  • Guided for headwinds to stay.

Expenses rose at a slower pace compared to revenue growth 

  • Singapore Airlines’ (SIA) 1HFY18 revenue grew 5.5% YoY to S$7.71b, driven by improvements across all business segments but largely attributable to:
    1. 2.9% growth in passenger flown revenue on increased traffic (+6.6%) but partly offset by lower yield (-3.1%), and
    2. higher cargo revenue on higher freight carriage (+6.1%) and yield (+6.7%). 
  • 1HFY18 operating expenses rose at a slower pace by 2.7% to S$7.20b, driven mainly by higher staff costs (+2.8%) and handling charges (+11.6%), but partly offset by lower rentals on leased aircraft (-6.9%). 
  • Despite the much higher growth in traffic, net fuel costs only increased by 0.8% due to a 91.1% reduction in fuel hedging loss in 1HFY18. Consequently, stripping out one-off items recorded in 1HFY17 and 1QFY18, 1HFY18 core PATMI jumped 106.1% YoY to S$252.0m, and formed 63.5% of our FY18 forecast, beating our expectations. 
  • As a result of improved performance, SIA has also raised its interim dividend from 9.0 S-cents in 2QFY17 to 10.0 S- cents in 2QFY18.

Uncertain outlook with yields under pressure 

  • Looking ahead, we expect competition to increase with significant capacity expansion by competitors in key markets. This will likely translate to the persistent pressure on passenger yields, albeit having seen some stabilization in the recent quarter. That said, we expect 3QFY18 to be a good quarter for cargo business as a result of the peak holiday season. 
  • Management stated traffic demand in 2QFY18 was supported by Europe, Southwest Pacific as well as the corporate passengers on the back of a seemingly improving global economic outlook. We expect this demand to continue in 3QFY18 but note that 4QFY18 has historically been the weak quarter. 
  • All considered, with capacity expansion on SIA’s key routes by competitors, outlook remains uncertain with yields under pressure.

Maintain HOLD 

  • On above expectations results, we raise our FY18F/FY19F PATMI by 29%/57% and core FY18F PATMI by 42%. 
  • Consequently, with no clear signs of a recovery in industry yields on the back of persistent competitive landscape, maintain HOLD with a higher FV of S$10.50 (prev: S$10.10), based on 0.9x FY18F P/B.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-11-09
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 10.50 Up 10.100