Singapore Airlines - CIMB Research 2018-02-13: Strong 3QFY18 Performance As Expected

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Strong 3QFY18 Performance As Expected

SIA’s 9MFY18 core net profit of S$494m made up 94% of our full-year forecast (83% of consensus), which we consider to be in line given expectations for a weaker 4Q.
The group’s YTD core net profit was up 58% y-o-y, but the same metric for 3QFY18 was only up 8% y-o-y, reflecting rising fuel-cost pressures.
The underlying driver for the 9M results was the strong demand for airfreight, which benefitted SIA Cargo as well as the bellyhold of SIA mainline.

Maintain ADD, with an unchanged target price of S$12.05, based on 1x CY18F P/BV.

The FSC airlines, SIA mainline and SilkAir, continued to come under pressure, with yields and passenger EBIT continuing their y-o-y declines into the 3Q.
In the case of SIA mainline, yields fell 1% y-o-y, which is improved from the 2% y-o-y decline seen in 2Q, but costs rose due to higher spot jet fuel prices (from US$57.60/bbl in 3Q17 to US$68.70/bbl in 3Q18), and increases in staff costs as SIA mainline began a recruitment drive in preparation for new aircraft delivery and future capacity expansion.

SilkAir’s EBIT fell y-o-y in 3Q18, as its aggressive ASK expansion required it to cut yields in order to drive higher loads, which it succeeded at the expense of earnings. Despite higher fuel costs, SilkAir’s unit costs fell on rising economies of scale, but its RASK fell faster.
As SilkAir continues its expansion drive, it will have to engage in promotional activity to drive sales, but as its network matures, its yields should stabilise and rise.

If there is one aspect to celebrate, it would be Scoot’s strong performance. Its 3Q18 EBIT rose almost 50% y-o-y, which was pleasantly surprising, given its lacklustre 1H performance when EBIT actually fell y-o-y.
RPK demand growth has been ahead of ASK capacity growth for the past three quarters, but what was interesting in 3Q was Scoot’s first-ever increase in quarterly yields in more than two years, suggesting a maturation of its network, and perhaps a fillip from the Osaka-Honolulu launch in December 2017.

Another big story for the SIA group was the stronger y-o-y demand for airfreight that pushed up cargo loads and yields. In 3Q18, SIA Cargo enjoyed its highest-ever quarterly profit since 3QFY06.
Demand rose far ahead of capacity growth, leading to healthy loads and strong yields, which more than offset higher unit costs. SIA Cargo’s 3Q18 EBIT rose by S$35m y-o-y, accounting for 85% of the group’s y-o-y rise in quarterly EBIT.

The demand for airfreight also benefitted SIA mainline’s earnings from its bellyhold, which is marketed by SIA Cargo, but which profits are booked under the SIA mainline entity.
While SIA mainline’s combined 3Q18 passenger and bellyhold EBIT rose by 9.2% y-o-y, it was due entirely to the rise in its bellyhold EBIT (together with earnings from other sources outside of the base passenger fare), which more than offset the 55% y-o-y drop in the underlying EBIT of the passenger airline business.

Spot jet fuel prices from 1 Dec 2017 until 13 Feb 2018 (reflecting a one-month lag in jet fuel pricing) averaged US$77/bbl.
Coupled with SIA’s hedge for 40.7% of its requirements at a strike price of US$65/bbl, 4Q18’s weighted-average cost should be around US$72/bbl, against US$65/bbl last year. This, coupled with the seasonally slower 4Q, suggests that the group will be very reliant on the continued outperformance of the cargo and LCC businesses to deliver the earnings for the final quarter.

We continue to have an ADD call on SIA due to: the continued strength of the cyclical demand environment in 2018F, the rapid pace of its aircraft renewal and product upgrades in the next few years, and SIA’s accelerating efforts at strategic transformation and restructuring.
Downside risks include potentially higher-than-expected jet fuel prices (we assumed spot jet fuel price to average US$75/bbl in FY19F against the spot price of US$76/bbl today), and continued expansion of the Middle East and Chinese carriers on long-haul routes.
For a detailed look at SIA’s structural dynamics, please refer to our report dated 22 January 2018: Singapore Airlines - Structural Reforms Accelerate; Cyclical Tailwinds Help.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2018-02-13

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 12.050 Same 12.050