Singapore Airlines (SIA) - UOB Kay Hian 2018-07-27: 1QFY19 Beats Expectations But Declining Pax Yields A Concern

SINGAPORE AIRLINES LTD SGX:C6L

Singapore Airlines (SIA) - 1QFY19 Beats Expectations But Declining Pax Yields A Concern

Core net profit growth exceeded our expectations, underpinned by higher-than-expected cargo yields and a decline in aircraft leasing costs.
Parent airline’s core earnings soared 151% y-o-y but this was entirely due to accounting changes. Excluding this, earnings would have declined 20.5% y-o-y.
We are concerned with pax yields, which fell across all its airlines. We will review our earnings estimates and target price pending updates from the analyst briefing on 30 July.

Singapore Airlines (SIA) restated its 1QFY18 net profit by S$102.8m, factoring in changes from D&A accounting. Excluding pre-tax EI gains of S$175m in 1QFY18, core net profit fell 27% q-o-q. Earnings were still better than expectations, underpinned by:
1. higher-than- expected cargo yields of 9.9% (vs our estimate of 5.5%);
2. a surprise 22% y-o-y decline (S$26m) in aircraft leasing cost.
SIA also changed the reporting structure, merging SIA Cargo under the parent airline. This brought the combined entities’ operating profit to S$181m, up 151% y-o-y, excluding 1QFY18 EI gains. This was double our initial estimate.
SIA also reported fuel hedging gains of S$132m, $30m higher than our expectations. Operating cash flow before working capital changes fell 21% y-o-y in 1QFY19.
Group pax yields fell 3.2% y-o-y amid a broad-based yield decline in parent airline, SilkAir and Scoot. Parent airline’s pax yields declined 1% vs 4QFY18’s +1% y-o-y. This is below our expectation of a 2.5% y-o-y increase although RASK (yields on a capacity basis) improved.

Excluding the decrease in depreciation charge of S$123.8m in 1QFY19, core operating profit would have declined 20.5% y-o-y.

Despite a 5% y-o-y rise in SilkAir’s revenue, operating profit dived 97.5% y-o-y due to:
1. 10.3% y-o-y contraction in yield; and
2. S$10m increase in net fuel cost.
We are particularly concerned as SilkAir’s yield of 10 S cents is the lowest since 2012. Similarly, Scoot’s operating profit fell 67% y-o-y as the 16.1% improvement in revenue (+S$58m) was negated by a 16.7% y-o-y increase in opex, primarily due to higher fuel prices.

The changes are as follows: fair values of certain aircrafts are restated at deemed cost (negative charge of S$1.65b) and foreign currency translation reserves reset to zero. These led to a S$13.9b reduction in equity base at the start of the year.
Taking into account profits for the quarter and fair value gains on outstanding fuel hedges (S$925m) book value per share on an adjusted basis amounted to S$11.79, an 8.4% increase from Mar 18.

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Against this backdrop, it appears that SIA is focusing on growing revenue via traffic growth rather than yields. Still, we are surprised that SIA has not attempted to pass on some of the increase in fuel cost.
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For now, we are unsure to what extent SIA will be successful, given weak operating cash flow.

whether the decline in parent airline’s pax yields was due to unfavourable forex movements or weaker back-end pricing environment;
reasons for the consistent decline in SilkAir’s pax yields, and
reasons for the 10% y-o-y rise in cargo yields and its sustainability in the coming quarters.

No change to our earnings estimates for now but we will revise our estimates pending updates from the analyst briefing.
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K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-27

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