Singapore Airlines (SIA) - UOB Kay Hian 2018-06-19: Lowering Earnings Forecast & Target Price On Concerns Over Cargo Profitability

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SINGAPORE AIRLINES LTD SGX: C6L

Singapore Airlines (SIA SP) - Lowering Earnings Forecast And Target Price On Concerns Over Cargo Profitability

• We lower our FY19 net profit forecast by 16% due to a potential decline in cargo traffic.
• 2MFY19 cargo traffic fell by 1.9% y-o-y. A potential reduction in exports to China due to the US’ trade protectionism and gradual economic slowdown could also lead to lower air cargo demand and revenue.
• We lower our fair value from S$12.60 to S$11.90 as we reduce P/B from 1.0x to 0.95x. Downgrade SIA to HOLD.
• Suggested entry: S$10.90.

WHAT’S NEW

Strong growth in pax load factor across all airlines

• Pax load factors for Singapore Airlines (SIA), SilkAir and Scoot rose 2.1%, 3.1% and 3.9% y-o-y respectively for May 18. Load factor for parent airline rose across all regions except Europe due to higher capacity injection.
• YTD pax load factors for SilkAir and Scoot rose 4.2% and 2.7% respectively y-o-y.

Cargo loads disappoint with 3.9% decline yoy

• SIA indicated that air cargo loads fell due to reduced cargo traffic across all route regions amid growth in cargo capacity. 
• We also note that as at 2MFY19, cargo traffic has also declined 1.9% y-o-y.

STOCK IMPACT

Improvement in SIA’s pax load factor marginally above expectations

• For FY19, we have assumed SIA’s pax load factor to decline by 0.2%. However, ytd pax load factors have risen by 1.9% y-o-y, indicating strong underlying demand for travel.

Rising global trade tensions likely to lower cargo traffic/revenue growth

• In FY18, cargo division registered the largest gain in operating profits among the airline subsidiaries. We believe that this could reverse in FY19 given:
  1. Growing concerns for Trade War between US, China and European states,
  2. Jan-May 18 non-oil domestic exports (NODX) to China has declined 3.3% y-o-y, and
  3. 2MFY19 cargo traffic has fallen 1.9% y-o-y.
• We believe that these are causes of concern for weakening cargo traffic for FY19, which will fall below our expectations of a 5% increase in cargo traffic.

Potential decline of exports to China could slow recovery of SIA’s cargo traffic

• In view of increased trade protectionism from the US and tentative signs of economic slowdown in China, exports to China are expected to decline.
• China is Singapore’s largest export market, having accounted for 18% of NODX in 2017, and reduced exports to China could potentially lead to lower NODX. NODX to China has already been on a downtrend. For the past year, SIA’s cargo traffic had a positive correlated to NODX and a potential decline could slow down recovery for SIA’s cargo traffic.

EARNINGS REVISION/RISK

• We thus lower our FY19 cargo traffic and yield estimates, resulting in lower cargo revenue estimate of 8%. Our FY19 net profit is thus reduced by 16% to $799.3m.

VALUATION/ RECOMMENDATION

Downgrade to HOLD, with a target price of S$11.90 (previous target price: S$12.60)

• We lower our fair value from S$12.60 to S$11.90 as we reduce P/B from 1.0x to 0.95x since SIA is expected to generate ROE of only 5.3%.
• At our fair value, SIA will be trading at 17.6x PE.

SHARE PRICE CATALYST

• Rise in global trade tensions.

K Ajith UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-19

SGX Stock Analyst Report HOLD Downgrade BUY 11.90 Down 12.600