Singapore Airlines (SIA SP) - UOB Kay Hian 2018-02-14: 3QFY18 62% Rise In Net Profit Is No Small Feat And Earnings Are Above Street’s Full Year Estimates By 20%

Singapore Airlines (SIA SP) - UOB Kay Hian 2018-02-14: 3QFY18: 62% Rise In Net Profit Is No Small Feat And Earnings Are Above Street’s Full Year Estimates By 20% SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - 3QFY18: 62% Rise In Net Profit Is No Small Feat And Earnings Are Above Street’s Full Year Estimates By 20%

  • While SIA's earnings were 6% lower than the two average estimates, it was nonetheless substantially higher than the street’s full-year estimates. 
  • SIA Cargo’s profits and Scoot’s profit growth were notable surprises. The former’s profit was the highest in 10 years, while the latter’s was the highest in 5 years. 
  • There are no revisions to our net profit estimates, and we will provide further updates post analyst briefing. Maintain BUY on SIA. Target price: S$11.90.



RESULTS


Earnings marginally lower than expectation, but SIA Cargo outperformed parent airline. 

  • 3QFY18 headline net profit grew by 61.5% y-o-y vs our expectations of 74% y-o-y. We believe these are an excellent set of results as 9MFY18 headline net profit exceeded consensus’ full-year estimates of S$593m by 20%. This implies that the street expects a 4Q loss, which we think is unlikely. 
  • Parent airline’s earnings were 30% lower than our estimates as unit cost grew by a larger-than-expected quantum (3.7% y-o-y vs our estimates of 1.73% y-o-y). In addition to rising unit costs, we infer that parent operating profit was affected by lower ancillary income and higher currency exchange losses. Although parent airline yields declined by 1% y-o-y, revenue per available seat-km (RASK) grew by 2.4% y-o-y. 
  • SIA Cargo beats expectations as yields rose by a whopping 12.1% vs our expectations of a 5.1% growth. 

Operating profit continued to rise for the 5th consecutive quarter and was at its highest in almost 10 years.

  • Scoot surprises with 48% y-o-y rise in operating profit, the highest in almost 5 years. Scoot’s operating profit grew by a whopping 2150% q-o-q as yields increased by 1.7% y-o-y. 
  • However, Silk Air continued to underperform as yields declined by 8.6% y-o-y. SIA noted that the decline in yields occurred as a result of the 13.0% expansion in operations, which outstripped growth in revenue. 
  • On a slightly positive note, Silk Air’s pax unit cost declined by 2.4% amidst the rising fuel prices.

S$44m hedging gain was more than double our estimates of S$20m. 

  • Future gains are also likely as SIA has hedged approximately 40.7% of its fuel requirements for 4QFY18 at about US$65/bbl on jet fuel. The group also possesses long-dated Brent contracts till FY23 at US$53-59/bbl, and these cover up to 47% of the group’s projected fuel consumption. 
  • In comparison, jet fuel prices are trading at an average price of US$80.5 in 2018.

Operating cash flow excluding working capital increased by 22.8% y-o-y in 9MFY18.

  • However, FCF ex-working capital changes remained in the red at a negative S$683m due to higher capex, which rose 43% y-o-y during the quarter. 
  • Meanwhile, book value rose 7.23% q-o-q to S$11.87 while equity base rose 1.2% y-o-y mainly due to improvements in fair value reserve and higher profits.


STOCK IMPACT


1% decline in pax yields not a real concern, stay invested. 

  • While we had expected flat yields, we believe that yields were impacted by unfavourable forex as the group recorded $19m in forex losses for the quarter. In addition, we believe that RASK should be a fairer comparison as it would exclude the anomalies of varying pax load factor. 
  • Using RASK (revenue per available seat-km) as a reference for yield, we note that it was 2.4% higher y-o-y and was an improvement over 2QFY18’s 0.3% y-o-y decline. We believe that SIA’s efforts to “stabilise yields” have proven fruitful as yields continue to improve across the board. 
  • Going forward, we expect yields to improve as the group continues to introduce new initiatives and technological innovations as part of its three-year transformation programme.


EARNINGS REVISION/RISK

  • There are no changes to our net profit estimates, and we will revise our earnings post analyst briefing. 


VALUATION/RECOMMENDATION

  • At current price of S$10.62, SIA’s airline business is valued at an undemanding 0.78x P/B. We continue to maintain our BUY recommendation with a target price of S$11.90.
  • We continue to value SIA 0.9x P/B.


SHARE PRICE CATALYST

  • Improving pax and cargo yields.








K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900



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