Singapore Airlines (SIA) - UOB Kay Hian 2018-05-18: 4QFY18 Earnings Trounce Estimates Core Net Profit Recovers From S$6m Loss In 4QFY17

Singapore Airlines (SIA) - UOB Kay Hian 2018-05-18: 4QFY18 Earnings Trounce Estimates Core Net Profit Recovers From S$6m Loss In 4QFY17 SINGAPORE AIRLINES LTD SGX: C6L

Singapore Airlines (SIA) - 4QFY18 Earnings Trounce Estimates Core Net Profit Recovers From S$6m Loss In 4QFY17

  • SIA reported vastly better earnings as it recognised profits from Krisflyer programme breakage and slot compensation. Still, even excluding these, core net profit more than doubled our forecast as pax yield was 2 S cents higher than our estimate.
  • Forward bookings were also exceptionally strong, rising 48% y-o-y, suggesting yields have improved. Key unknown is the quantum of fuel hedges. We will provide more information pending an analyst meeting.
  • For now, maintain BUY. Target price: S$11.90.



RESULTS


Trounces estimates; core net profit more than doubled.

  • Singapore Airlines’ (SIA) FY18 net profit of S$893m beat our estimate of S$765m and street estimate of S$711m (previously S$666m). 4QFY18 net profit was also higher than our estimate of S$54m and the street’s implied estimate of zero profit. 
  • Key reason was the parent airline’s operating profit which was S$134m higher than expected due to:
    1. higher pax yield of 10.3 S cents, which came in 0.2 S cent above forecast);
    2. recognition of KrisFlyer programme breakage rate adjustment of S$63m; and
    3. slot compensation of S$19.3m.
  • SIA Cargo’s 4Q FY18 operating profit was also S$21m higher than expected, primarily due to flat unit cost. Scoot’s operating also fared 15% better than forecast while Silk Air’s operating profit was lower due to weaker yield. SIA also recognised S$84m in fuel hedging gains although this is not an EI item. Excluding one-offs, SIA’s 4QFY18 core net profit at S$114.3m more than doubled our estimate.
  • Non-operating profit was S$22m in 4QFY18, reversing from a loss of S$27.9m in 4QFY17 as airline associates’ profitability improved.
  • SIA declared a final dividend payout of 30 S cents, which while higher than expected, amounted to a 12ppt reduction in payout ratio to 53%.

Parent airline’s pax yields improved by 0.1 cent to 10.3 S cents.

  • SIA restated 4QFY17 pax yield from 10.1 S cents to 10.2 S cents. RASK - revenue expressed as a proportion of passenger capacity - rose 2.4% y-o-y, the second consecutive rise in the year. Interestingly, pax yields improved in Feb and Mar 18 by 0.2 S cents.

Guidance is a tad more positive.

  • SIA’s forward bookings rose 48% y-o-y, indicating that yields have improved. SIA also note that demand for travels remains robust.

Adoption of IFRS1 would lower book value by 13.4%.

  • IFRS1 mandates the application of fair value accounting on aircraft and spares and resetting of the foreign currency translation reserves. This will result in book value being lowered by S$1.91b on a proforma basis in FY18 but raise pro-forma net profits by S$426m in FY19, S$322m in FY20 and S$234m in FY21.


STOCK IMPACT

  • Good results. Improvement in pax yields, forward bookings and SIA’s more optimistic take are key positives. Interestingly, SIA did not provide a guidance on fuel hedges, presumably for competitive reasons. Still, we believe the effective fuel cost per bbl would be lower as SIA is likely to have hedged at least 33% of its fuel cost for FY19. We will provide further guidance post analyst briefing.
  • On a proforma basis, SIA would be trading at 1.05x FY18 P/B, following the implementation of IFRS1. On a forward basis, we estimate P/B multiple at 1.0x for FY19. We estimate the upside would be capped near 1.1x book value.


EARNINGS REVISION/RISK

  • We will formalise our FY19 earnings estimate post analyst briefing.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$11.90. We continue to value SIA at 0.9x FY19F P/B.


SHARE PRICE CATALYST

  • Improving pax and cargo yields.





K Ajith UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-18
SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900



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