Singapore Airlines (SIA SP) - UOB Kay Hian 2017-11-09: Analyst Briefing Takeaways ~ Cargo Recovery Intact, 3QFY18 Should See Further Improvement

Singapore Airlines (SIA SP) - UOB Kay Hian 2017-11-09: Analyst Briefing Takeaways: Cargo Recovery Intact, 3QFY18 Should See Further Improvement SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Analyst Briefing Takeaways: Cargo Recovery Intact, 3QFY18 Should See Further Improvement

  • While 2QFY18’s earnings was better than expected, SIA still remains cautious on yields. That said, we believe that 3QFY18 earnings will also be strong, bolstered by strong cargo profits and very likely higher yields. 
  • We also believe that SIA will recognise further fair value gains on forward Brent hedges. Based on these factors, we raise our fair value for SIA to S$11.10, valuing core airline operations at 0.8x FY18’s book value, despite implied ROE of just 3.8%. 
  • Maintain HOLD. Suggested entry: S$10.30.



ANALYST BRIEFING TAKEAWAYS


Doubling in parent airline’s operating profit aided by higher incidental income and load factor, rather than yields. 

  • While the street has reacted positively to parent airline’s results, part of the better-than-expected increase was due to higher belly-hold revenue, which in turn was due to a cargo recovery and higher aircraft lease revenue. Pax yields declined by the same quantum as 1QFY18. 
  • Notably, Singapore Airlines’ (SIA) guidance on outlook has changed somewhat from being “less negative” on yields (1QFY18) to “yields remain under pressure”. The same trend was seen on sister carrier, Silk Air. SIA also stated that the bulk of the decline in yields was due to weak local currency yields and that forex movement lowered the quantum of decline. 
  • We believe that increasing capacity addition by the Chinese carriers towards ASEAN could have impacted short-haul yields for both parent airline and Silk Air. That said, we have assumed that yields will improve by roughly 1.5% in 2H17. Beyond that, there is a possibility that capacity additions by Norwegian Air and Qantas could derail

Cargo conditions are buoyant and are supportive of sequential improvement in the peak 3Q period. 

  • Seasonal demand during the Thanksgiving and Christmas period is expected to lead to further improvement in air cargo yields and load factor. SIA also stated that they will be uplifting more cargo via bellyhold, which should boost parent airline’s profits further. 
  • 2QFY18’s cargo yields were already higher than that of 3QFY17’s, when profits rose to a multi-year high of S$53m. We believe that cargo profits for 3QFY18 are likely to show yoy growth. 
  • Beyond FY18, we believe that cargo recovery could potentially peter out, especially if freighter capacity rises.


STOCK IMPACT


Not much has changed, but we are focusing on a blue-skies scenario for the next two quarters. 

  • First, we have raised our yield estimate by 1% and now estimate that pax yields will rise by about 1.6% in 2HFY18. 
  • Next, we believe that SIA’s reserves could be boosted further by fair value gains if Brent prices rise. 

SIA had long dated Brent hedges at US$53-59/bbl. 

  • While forward curve is in backwardation, it is still higher than SIA’s stated range. We thus expect SIA to report further fair value gains by year end and expect book value to rise to S$11.68 from S$11.07. If so, SIA’s stock price could rise marginally further. We thus raise our fair value P/B for SIA’s airline operations from 0.7x to 0.8x and derive a fair value of S$11.10.


EARNINGS REVISION/RISK

  • We raise our FY18 core net profit estimate by S$189m as we factor in the better-than-expected earnings, further cargo profits and slight improvement in yields. 
  • For 2HFY18, our numbers imply a 33% yoy rise in core profits.


VALUATION/RECOMMENDATION

  • We raise our target price slightly to S$11.10 from S$10.10, valuing SIA’s core operations at 0.8x FY18 book value. 
  • SIA’s core airline business is estimated to generate ROE of just 3.8% in FY18.


SHARE PRICE CATALYST

  • Moderate capacity additions.




K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-09
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 11.100 Up 10.100



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