Singapore Airlines (SIA SP) - UOB Kay Hian 2018-02-15: Analyst Briefing Takeaways ~ SIA Is Now More Sanguine On Yields

Singapore Airlines (SIA SP) - UOB Kay Hian 2018-02-15: Analyst Briefing Takeaways ~ SIA Is Now More Sanguine On Yields SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Analyst Briefing Takeaways ~ SIA Is Now More Sanguine On Yields

  • SIA noted that 3QFY18 earnings are reflective of efforts to maximise revenue by stabilising yields and improving load factors. The marginal decline in pax yields is not indicative of parent airline performance as RASK grew by 2.4% y-o-y. 
  • SIA also expects MRO costs to decrease significantly as they start to return leased planes.
  • Going into 4QFY18, we expect a reversal from the loss in 3QFY17, underpinned by strong cargo yields and improving pax yields. Maintain BUY. Target price: S$11.90.



WHAT’S NEW


SIA is pleased with the 3QFY18 results, indicates that yields are stabilising. 

  • SIA noted that there is strong underlying demand, but West Asia, the transpacific route from US to Asia, and intra Southeast Asia regions continue to face pressure from excess capacity. However, there is a sense that airlines are trying to pass on cost increases. SIA also restated its pax yields in 3QFY17 by 0.1 S cents to 10.5 S cent. Hence while our absolute yield estimate of 10.4 S cents was correct, it nonetheless declined by 1% y-o-y.
  • SIA indicated that forex contributed to the lower yields but overall local currency yields fell yoy. Higher premium mix on several aircraft buffered the extent of yield erosion.


Trade-off between yields and load factor, and thus RASK could be more indicative.

  • The latter expresses yields relative to total capacity and ignores variations in load factors. On that front, SIA fared well, with RASK rising 2.4%. Hence, that is a key positive. 
  • SIA also believes that yields could be at an inflexion point.


Cost well managed, expects lower maintenance costs (MRO) and cites the possibility of higher landing fees. 

  • A380 refurbishment costs will be capitalised and depreciated accordingly and thus will not add on to MRO cost. SIA also noted that in earlier periods, there were greater return to lessor checks which added to MRO costs, but as leases expire (five A380 leases would expire over the next nine months), there would be lower MRO costs. SIA also highlighted that they plan to have 5% y-o-y vs our expectations of 74% y-o-y for the MRO charges. 
  • Landing fees out of Changi account for about 25% of landing & parking as well as overflying charges. Thus a 30% increase in such costs will raise costs by S$60-65m annually. However, SIA has indicated that they have yet to receive any official indication of landing fees or passenger service charge (PSC) increase by Changi Airport. 
  • SIA also noted that airlines will pass on PSC cost increases to customers.

Remains optimistic on cargo operations. 

  • Management noted that strong e-commerce has been the main driving force behind the growth in cargo revenue and profitability, as the former grew by 15.9% y-o-y in 3QFY18 leading to a 66% y-o-y increase in operating profit. However, SIA believes it would be difficult to maintain the current growth rate and that yield growth could fluctuate throughout the year. That said, cargo earnings were promising with y-o-y improvement for the month of January. 
  • Going into FY19, we expect cargo revenue to rise by 7% y-o-y, underpinned by marginally higher cargo yields.


STOCK IMPACT


Yields should continue to improve as SIA continues to introduce new initiatives and technological innovations. 

  • SIA highlighted that the application of their Revenue Management System algorithm has helped to improve RASK (revenue as a percentage of seat capacity). We also expect ancillary income to rise following the introduction of SIA’s digital wallet which allows customers to redeem Kris Flyer miles for shopping merchandise. 
  • On a slightly negative note, rising fuel prices could result in a reduction of pax load factors as SIA could pass on rising costs to passengers by raising ticket fares. However, SIA has hedged substantially and this should help to commensurate the rise in fuel prices.


EARNINGS REVISION/RISK

  • We lower our FY18 net profit estimates by 4.8% to S$600.5m as we factor in lower yield from parent airline in 4QFY18.


VALUATION/RECOMMENDATION

  • We continue to maintain our BUY recommendation with a target price of S$11.90. 
  • We continue to value SIA at 0.9x FY18F P/B.


SHARE PRICE CATALYST

  • Improving pax and cargo yields.





K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-15
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900



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