Singapore Airlines (SIA SP) - UOB Kay Hian 2018-05-07: 4QFY18 Results Preview ~ Likely To Surprise On The Upside

Singapore Airlines (SIA SP) - UOB Kay Hian 2018-05-07: 4qfy18 Results Preview ~ Likely To Surprise On The Upside SINGAPORE AIRLINES LTD SGX: C6L

Singapore Airlines (SIA SP) - 4QFY18 Results Preview ~ Likely To Surprise On The Upside

  • SIA will be reporting 4QFY18 and full-year results on 17 May. We expect full-year net profit of S$765m and 4QFY18 net profit of S$54m, reversing from the S$6.4m loss in 4QFY17. 
  • Ideally, we would like to see improved cash flow via sale and leaseback as this would reduce risk of higher debt or additional equity to fund future capex.
  • Maintain BUY. Target price: S$11.90.



Likely to beat street expectations.


Bloomberg consensus estimates Singapore Airlines (SIA) to report S$666m in net profit for FY18.

  • Excluding outlier, the number translates to S$695m or a loss of S$11m for 4QFY18. We expect SIA to report S$54m in net profit for 4QFY18 and S$765m for the full year. 
  • Our more optimistic prognosis is underpinned by:
    1. marginal profitability from the parent airline;
    2. higher cargo profits, underpinned by increased volume and ASP (+9.6% y-o-y); and
    3. higher profits from Scoot, arising from a 4.8ppt improvement in pax load factor.
  • At the non-operating level, we expect SIA’s JVs to show y-o-y growth due to increased engine checks from SIA Engineering’s engine JVs. However, we expect losses from associates, Vistara, Nok Scoot while Virgin Australia is expected to reduce overall profits from JV and associates. Core earnings are expected to reverse from a loss of S$6.4m in 4QFY17.
  • We expect SIA to declare a final dividend of 17 S cents, but full-year dividend payout to be reduced from 65% to 40%.

Expecting flat pax yields but marginally higher RASK.

  • In 3QFY18, SIA’s pax yields fell by 1% y-o-y. We have assumed pax yields to remain flat at 10.1 S cents. We believe local yields would have improved but a stronger Singapore dollar could have impacted tickets outside of Singapore. RASK, which is revenue expressed as proportion of passenger capacity, is estimated to have risen by 1% y-o-y vs a 2.3% y-o-y increase in 3QFY18.


STOCK IMPACT


Extent of improvement in pax yields and degree of improvement in ancillary income would be key to earnings.

  • We have assumed flat pax yields and believe the street is implicitly looking at a decline in pax yields for 4QFY18. If yields turn out to be better and SIA also records higher ancillary income from the implementation of advance seat selection, Krisflyer mileage conversion and credit card charges, it could be a positive stock price catalyst. 
  • SIA has also announced a tie-up with C-trip, which would enable customers booking on SIA via Ctrip to purchase KrisShop merchandise.

Early signs of a peak in air cargo demand.

  • IATA has noted that global air traffic growth as at Mar 17 had slowed to a 22-month low and that Asia-Pacific carriers’ air traffic growth has slowed down to just 1.9% y-o-y in March, substantially lower than the 10% average over the past 12 months. IATA believes that much of the improvement that came on the back of restocking is now behind us and that growth is likely to moderate. 
  • For the past three quarters, SIA booked in S$120m in operating profit from cargo operations, vs S$8m in the preceding quarters. As at 9MFY18, SIA Cargo accounted for 14% of group operating profit. This is likely to decline in FY19.

Cash flow will be closely watched.

  • If SIA manages to dispose off aircraft and thus reduce improve cash flow, then it would require less debt to fund capex. As at 9MFY18, SIA generated just S$83m from sale of PPE, while recognising capex of S$4.3b (guidance for FY18 is S$6.0b). 
  • Despite raising S$1.6b in net debt, SIA’s internal cash flow was depleted by 29% to S$2.9b. We have estimated SIA will raise S$3b in debt by end-FY18. 
  • SIA’s cash generation via capex and asset sales (via organic sale and via sale-and- leaseback) will be key earnings determinant.

Questions that we plan to raise at analyst meeting.

  1. What is SIA’s target gearing for the next two years;
  2. would SIA look to raise equity to fund capex; and
  3. what is SIA’s visibility on air cargo traffic demand?


EARNINGS REVISION/RISK

  • We will formalise our FY19 earnings estimate post results briefing. Weakening cargo traffic remains the biggest risk.


VALUATION/RECOMMENDATION

  • Maintain BUY and 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 | https://research.uobkayhian.com/ 2018-05-07
SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900



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