Singapore Airlines - Maybank Kim Eng 2018-11-09: 2QFY19 Challenges In The Price


Singapore Airlines - 2QFY19 Challenges In The Price

Double whammy in the price; Upgrade to HOLD

  • We estimate a 2QFY19 (out 13 Nov) core net profit of SGD118m (-38% y-o-y, -16% q-o-q). We think yield attrition and higher jet fuel prices will weigh on its bottom line. Otherwise, the company has done a good job of raising overall loads by 1.7ppts y-o-y to 73.3%, a record since 2010.
  • We raise FY19-21E earnings by 3.9-5.5% to factor in higher load factors, its latest traffic-growth plans and new USD/SGD estimates.
  • Our Target Price climbs to SGD9.80, still at FY20E P/BV of 0.82x, 1SD below its 10-year mean.
  • SIA’s share price has declined by 13% in the last quarter. As we believe this has priced in its near-term challenges, upgrade to HOLD.

Best operating statistics dating back to 2010

  • Overall traffic (passenger + cargo) in 2QFY19 grew 2.9% y-o-y. Load factor went up by 1.7% y-o-y to 73.3%. This was the group’s highest load factor since 2010.
  • Changi Airport has slapped a SGD13.30 or 39% increase in passenger tariffs beginning Jul 2018.
  • We also notice that published ticket fares are on the low side and factor in an 8% yield decline for 2QFY19 (8% decline in 1QFY19).

Outlook challenging on fuel price volatility

  • The fuel market is exceptionally volatile due to the US-China trade war and US embargo on Iran. As SIA has hedged 47% of its FY19 requirements at USD65/bbl (Brent), it should be better positioned than the other airlines.

Let the dust settle before stepping in

  • SIA’s 2QFY19 will be saddled with big losses from its 20% associate, Virgin Australia (VAH AU, Not Rated), which reported a net loss of AUD603.5m in its 2H18 results. SIA’s share of losses could be SGD50-60m in 2QFY19 but we deem this non-core as the bulk is accounting in nature.
  • We also believe we have adequately factored in its near-term risks.

Operating statistics

Traffic growth healthy

  • Passengers carried by the group grew 8.4% y-o-y to 9.1m in 2QFY19. This was above its long-term average of 5% growth (excluding its Tigerair acquisition), which suggests healthy passenger traffic growth.
  • Cargo growth was equally healthy at 2.9% y-o-y in 2QFY19.

Load factor

  • Group passenger load factor soared by 3.1ppts y-o-y to 84.9% in 2QFY19. We think yields were dropped in order to promote loads.
  • Cargo load factor was slightly down by 0.5ppt y-o-y to 63.5%. The air cargo industry has been performing very well in the past 2.5 years, driven by growth in the electronics segment and Internet retail sales.

New fair value of SGD9.80

  • SIA has been trading range-bound, close to 1SD below its P/BV mean, in the past two years. We believe 1SD below mean is an apt valuation, given that its short-term outlook is clouded by volatile fuel prices, higher Changi Airport charges and huge one-off losses from Virgin Australia.
  • Using a one-year forward P/BV of 0.82x, we derive a Target Price of SGD9.80 after our earnings revisions.
  • SIA’s share price has declined by 13% in the last three months. As we believe this has priced in its near-term challenges, upgrade to HOLD from SELL.

Mohshin Aziz Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-11-09
SGX Stock Analyst Report HOLD UPGRADE SELL 9.80 UP 9.650