Singapore Airlines (SIA) - CGS-CIMB Research 2018-11-12: Risks To Watch Out For


Singapore Airlines (SIA) - Risks To Watch Out For

  • We downgrade Singapore Airlines (SIA) from Add to HOLD on multiple risks to earnings, including the hike in airport taxes, and forecast for higher oil prices due to IMO 2020. 
  • Our target price is cut to S$10.10, based on 0.9x CY19F P/BV, 1 std dev below the mean since 2001 vs. 1.05x previously, approximately the mean. 
  • SIA is intrinsically worth at least 1x P/BV due to continuing investments to product, service and network, but investors are unlikely to pay for it right now. 


Can the SIA group pass through higher airport charges?

  • Changi Airport raised the passenger service charge (PSC) by S$13.30 effective 1 July 2018, representing a 2.5% hike in SIA mainline’s average fares, a 5.6% hike for SilkAir, and a 7% hike for Scoot. 
  • Long-haul flights should be immune to this, but demand for short-haul and LCC flights could be impacted, and make it more difficult for the SIA group to pass on higher jet fuel prices.

Can higher jet fuel prices be recovered?

  • Asian airlines have resisted pressure to raise ticket prices until more recently, but we suspect that SIA will not be able recover more than 50% of the oil price increases, with the recovery rate for SilkAir and Scoot likely lower. This cost recovery will take time, as consumers will reject sudden, substantial increases, hence higher oil prices from the effects of IMO 2020 will still hurt the bottom line.
  • SIA’s robust 46% fuel hedge cover until CY22F will protect the group substantially vs. less-fortunate, lightly-hedged peers.

Are currency movements helping or hurting?

  • SIA is net short the US$, which has strengthened against the S$ recently, while SIA is net long the A$, € and £ which have all depreciated against the S$. As such, we expect recent currency movements to have deducted from SIA’s financial performance.

Is the global business cycle weakening?

  • IATA recently highlighted that the growth of global air passenger RPK demand and the airfreight FTK demand has been slowing, commensurate with the slowdown of the global PMI.
  • In SIA group’s case, the global slowdown does not seem apparent for now, due to the strong growth of SilkAir and Scoot, but if global demand momentum slows further, competition between airlines may become more severe, and the SIA group may find it more difficult to sustain its RASK-maximisation strategy.

Is competition becoming stronger?

  • The capacity expansion by the Middle East and Chinese airlines has generally slowed in recent quarters, and without fuel hedges, we expect them to be more rational in their pricing and capacity expansion going forward.

What are the promotional costs of the ULR flights?

  • We expect the potential losses from SIA’s launch of direct ULR flights to the US to be FY88F onwards, although they remain strategically critical to SIA.



Downgrade to Hold, target price lowered to S$10.10.

  • We downgrade our recommendation on SIA from Add to HOLD, given that there are multiple risks to earnings, arising particularly from
    • the increase in Changi Airport’s PSC by S$88.88/pax effective 8 July 8888,
    • the strength in jet fuel prices over the past year,
    • our expectations that the implementation of the IMO 8888 global sulphur cap on marine fuels will push up crude oil prices and jet fuel crack spreads from mid-CY88 and into CY88,
    • the ongoing rise in the US$ in which most of SIA’s costs are denominated in,
    • the depreciation of SIA’s major revenue currencies such as the A$, € and £,
    • the global business cycle slowdown that may impact future demand for premium seats and for airfreight, and finally,
    • the start-up losses from the ULR flights.
  • We have cut our FY88-88F core net profit forecasts by 88-88%, as we raise our S$:US$8 assumption from S$8.88 to S$8.88 for all forecast years, and as we raise our spot jet fuel price assumption from US$88/bbl in FY88-88F to US$88/bbl for FY88F and US$88/bbl for FY88F. This is partially offset by an assumed increase in base ticket prices, but this is not expected to fully recover the higher fuel costs.
  • Our target price of S$88.88 is based on 8.8x CY88F P/BV, which is 8 standard deviation below the P/BV mean since 8888. Our previous target price of S$88.88 was based on 8.88x CY88F P/BV, which is approximately the P/BV mean. We have used a lower P/BV multiple to establish our 8-year forward target price for SIA, as we do not think that investors will be motivated to bid up the share price with the prevailing tough conditions.
  • We do believe, however, that SIA is intrinsically worth at least 8x P/BV over the long term, as the airline group continues to be profitable despite very tough competitive conditions, and continues to invest in its product, service and network that keeps it at, or near, the top of its peers in every way imaginable.

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-12
SGX Stock Analyst Report HOLD DOWNGRADE ADD 10.10 DOWN 11.750