Singapore Airlines (SIA) - DBS Research 2018-02-14: Fuller Planes, Better Profits

SINGAPORE AIRLINES LTD SGX: C6L

Singapore Airlines (SIA) - Fuller Planes, Better Profits

Singapore Airlines' 3QFY18 net profit of S$286m beats expectations due to better-than-expected load factors and yields.
SIA should see better yields ahead as global economy continues its synchronised recovery.
Lifting FY18F/19F/20F forecasts by 18%/26%/28% respectively on higher yield assumptions.
Upgrade to BUY with S$12 target price.

We are more upbeat on the outlook for SIA as it should benefit from strong travel demand from the synchronised global economic recovery, which should keep load factors firm and improve passenger yields for its flagship segment.
Meanwhile, the cargo business should also remain fairly strong as trade conditions stay fairly buoyant. Contributions from key subsidiaries Silkair and Scoot are also expected to improve as both regional and leisure air travel demand continue to grow.

We have higher-than-consensus forecasts as we have factored in a 2-3% yield improvement per annum in FY19F and FY20F for SIA’s flagship passenger business.

SIA’s share price could rerate 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.

While jet fuel prices have moved higher y-o-y, SIA is in a better position than most as it has put in longer-dated Brent hedges with maturities up to FYE March 2023, covering up to 47% of the group’s projected annual fuel consumption, at an average price ranging from US$53-59 per barrel.

Our S$12 target price is based on 1x FY19 P/BV, which is at about its historical mean and reflects the improving ROE outlook for the company – from less than 3% in FY17 to 6% by FY20F.

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

SIA's 3QFY18 profit jumps 62% y-o-y to S$286m. This was led by a 12.5% y-o-y improvement in EBIT to S$329m, the absence of a write-down of the Tigerair brand and trademark made last year of S$79m, as well as improved contributions from associates and joint ventures.
For 9M18, net profit grew by 43% y-o-y to S$711m, which is ahead of our expectations. Revenue grew 5.7% y-o-y to S$11.8bn.
Broad-based revenue growth in 3QFY18: There was a 6.1% y-o-y increase in revenue to S$4.1bn on revenue improvements in all business segments. At its flagship segment, a 4.4% y-o-y growth in passenger carriage more than offset a slight 1% decline in yield, which was better than we had expected, as load factor improved by 2.6pts to 81.6%. Cargo revenue was also up by nearly 17% y-o-y on 4.4% higher carriage and 12.1% better yield.
Stronger contributions from most segments. EBIT contributions from most of SIA’s key segments were better y-o-y in 3QFY18 vs 3QFY17: S$155m vs S$151m for the flagship segment, S$19m vs S$30m for Silkair, S$43m vs S$29m for Scoot, S$88m vs S$53m for SIA Cargo, and S$18m vs S$25m for SIA Engineering.

Paul YONG CFA DBS Vickers | https://www.dbsvickers.com/ 2018-02-14

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