Singapore Airlines - DBS Research 2018-01-30: Yields Need To Catch Up

Singapore Airlines - DBS Vickers 2018-01-30: Yields Need To Catch Up SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Yields Need To Catch Up

  • Expect some yield improvement to offset higher fuel costs, driven by improved global economic outlook.
  • Current share price has already factored in a fair amount of yield increase over the next 2 years.
  • SIA remains vulnerable to fuel price volatility and price competition.
  • Maintain HOLD, Target Price S$10.55 (0.9x FY19F P/BV).



Maintain HOLD; yields need to reverse decline and grow to offset higher fuel costs. 

  • The price of jet fuel has risen to nearly US$85 per barrel currently, albeit accompanied by some USD weakening, which could further threaten SIA’s profitability.
  • With a synchronised global economic recovery, we believe that yields could recover slightly to help offset higher fuel costs but we would need to see very strong demand before yields can improve enough to drive significantly higher profits. We see currently valuations as already pricing in 3%-4% yield increase per annum over the next two years, which is fair.


Where we differ: 

  • We have higher than consensus forecasts as we have factored in a 2.5% yield improvement per annum in FY19F and FY20F for SIA’s flagship passenger business.


Potential catalysts: 

  • SIA’s share price could re-rate if it can demonstrate a sustained improvement in revenues either from increasing its passenger yield or growing other revenue streams and/or materially lower its operating costs without affecting product quality and revenues.
  • Business review could lead to longer-term profitability but near-term outlook remains challenging. SIA’s 3-year transformation plan could pay off in the longer term, but we remain cautious on the company's near-term earnings outlook as its flagship passenger business continues to face stiff competition and soft yields, and is also vulnerable to the threat of higher oil prices.


Valuation

  • Our S$10.55 target price is based on 0.9x FY19 P/BV, which is at c. -1SD its historical mean and reflects the sluggish outlook for SIA with projected ROEs of c. 5% in FY19F & FY20F.


Key Risks to Our View

  • Vulnerable to demand shocks and/or fuel price increase. With operating margins razor thin, SIA is vulnerable to any demand shocks and/or an increase in fuel prices.




Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-01-30
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 10.55 Up 10.300



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