Singapore Airlines - UOB Kay Hian 2018-07-18: 1QFY19 Results Preview ~ Core Earnings To Rise 11% Yoy Despite A 42% Yoy Rise In Fuel Prices

Singapore Airlines (SIA) - UOB Kay Hian Research 2018-07-18: 1qfy19 Results Preview ~ Core Earnings To Rise 11% Yoy Despite A 42% Yoy Rise In Fuel Prices SINGAPORE AIRLINES LTD SGX:C6L

Singapore Airlines - 1QFY19 Results Preview ~ Core Earnings To Rise 11% Y-o-y Despite A 42% Y-o-y Rise In Fuel Prices

  • Singapore Airlines (SIA) will report 1QFY19 results on 26 July. 
  • We estimate an 11% y-o-y rise in core net profit, underpinned by strong passenger throughput and load factors, as well as lower D&A.
  • Yesterday’s 4% rise in SIA's share price highlights street expectations of a strong quarter.
  • Pending results and company guidance, maintain HOLD as we assess impact on earnings from weak cargo traffic and earnings. Target price: S$11.90. Suggested entry range: S$10.50-10.60.



WHAT’S NEW - 1QFY19 RESULTS PREVIEW


Expecting lower headline net profit, core net profit to rise 11% y-o-y in 1QFY19. 

  • Singapore Airlines (SIA) saw extraordinary items of S$115m for Krisflyer and S$70m slot compensation gains in 1QFY18 42% rise in fuel costs.
  • We also expect SIA to recognise about S$100m in fuel hedging gains.

SIA Cargo likely to disappoint after turning to profit in FY18.

  • In 1QFY19, cargo load factors and cargo throughput declined 4.3ppt and 0.3% y-o-y respectively. Against the backdrop of a rising global trade war, slowdown in growth in China and reduced non-oil domestic exports to China, we believe the cargo weakness could persist in the upcoming quarters. However, yields are likely to remain resilient at least for another quarter.
  • We note that Taiwanese carriers reported double-digit growth in cargo yields in 2Q18. We have assumed a 5.5% y-o-y increase in cargo yields for 1QFY19. Even so, we expect SIA Cargo to report the first operating loss in five quarters.

Parent airline and SilkAir could act as buffer as 1QFY19 pax throughput rose by a whopping 5.4% and 15.3% respectively.

  • 1QFY19 pax load factors for the parent airline and SilkAir also increased by 2ppt and 3.4ppt respectively. However, SIA’s profitability will be impacted by rising fuel costs, with into plane jet fuel costs increasing 42% y-o-y. 
  • We expect Scoot’s operating profit to be marginally in the red, given a relatively higher exposure to fuel costs and flat load factor.


STOCK IMPACT


Extent of trade-off between pax yields and fuel cost will be a key factor.

  • We have assumed a 2.5% y-o-y load factor (-4.3ppt) for 1QFY19 could compound the impact of rising fuel prices.
  • At the balance sheet level, SIA will be a net beneficiary of rising fuel prices due to forward hedges, placing it ahead of competitors without hedging strategies. SIA had guided that every US$1/bbl increase in fuel prices will lead to a S$110m increase in shareholder’s equity. To date, Brent crude prices have risen by US$4.90/bbl.

Yields could rise in 2QFY19 and beyond.

  • Asia Pacific airlines eg Eva Air, Korean Air and Japan Air have passed on the increase in fuel prices as fuel surcharges. Also, long-haul flight tickets out of Hong Kong could rise by HK$600 in fuel surcharges. We believe that this allows for an optimistic pricing environment, potentially increasing pax yields.
  • For the parent airline, every 0.1 S cent rise in pax yields will raise operating profits by S$24.4m, or 20%.


EARNINGS REVISION/RISK

  • No change to our net profit estimates. We have however tweaked our FY19 shareholder’s equity by 5% as we estimate higher fair value gains from fuel hedging.


VALUATION/RECOMMENDATION

  • Maintain HOLD and target price of S$11.90, valuing core airline operations at 0.9x P/B.
  • Suggested entry price is S$10.50-10.60.


SHARE PRICE CATALYST

  • Improving pax yields and easing fuel costs.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-18
SGX Stock Analyst Report HOLD Maintain HOLD 11.900 Same 11.900



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