Singapore Airlines (SIA) - DBS Research 2018-11-14: Passenger Yield Fails To Improve


Singapore Airlines (SIA) - Passenger Yield Fails To Improve

  • SIA's 2Q19 EBIT falls 35% y-o-y to S$233m on higher fuel costs and lower passenger yield - below expectations.
  • Including share of one-off losses of S$116m at associate Virgin Australia, interim profit fell 69% y-o-y to S$196m; interim DPS cut by 20% to 8Scts. 
  • We cut FY19F/20F EPS estimates by 31%/23%. 
  • Downgrade to HOLD with Target Price of S$10.20. 

Downgrade to HOLD with Target Price of S$10.20.

  • SIA reported 2Q19 earnings that were below our expectations as passenger yield for the flagship segment declined 1% y-o-y and one-off share of losses at associate Virgin Australia led to 81% decline in net profit for the quarter to S$56.4m, with interim earnings falling by 81% y-o-y to just S$196m.
  • Meanwhile, the Group also cut its interim dividend from 10Scts to 8Scts.

Where We Differ:

  • We lower our FY19F and FY20F estimates by 31% and 23% respectively to reflect lower passenger yield assumptions and the one-off losses at Virgin Australia, and expect consensus to also cut forecasts.

Potential Catalysts:

  • SIA’s share price could re-rate on the back of yield recovery, sustained improvement in revenues, and ongoing cost management initiatives to lower its costs.
  • More significant passenger yield improvement is needed for core earnings to rebound. With fuel prices at a substantially higher level currently, passenger yields need to improve for SIA to post returns equal or better than its cost of capital.
  • Meanwhile, SIA’s transformation program has started to bear fruit as non-fuel costs across all segments have fallen and further gains from the program could help to alleviate cost pressures and further optimise revenues.


  • Lowering Target Price to S$88.88 based on 8.88x FY88 P/BV, against a projected ROE of 8.8%.
  • We cut our DPS forecast from 88Scts to 88Scts, translating to 8.8% prospective yield for the stock.

Key Risks to Our View:

  • Vulnerable to demand shocks and/or fuel price increase. With operating margins at razor thin levels, SIA is vulnerable to any demand shocks and/or an increase in fuel prices.

WHAT’S NEW - Weak 2Q19 earnings drag interim profits even lower

EBIT declined even as revenues improved in 8Q88:

  • SIA's 8Q88 group revenue increased 8.8% y-o-y to S$8.88bn on higher carriage across all its key segments but EBIT fell by 88% y-o-y to S$888m as fuel costs rose by 88% y-o-y to S$8,888m. Non-fuel costs rose at a slower pace than revenue growth at 8.8% y-o-y.
  • EBIT declined for SIA’s flagship passenger segment by 88% y-o-y to S$888m while both Silkair (-S$8m) and Scoot (- S$88m) slipped into losses during the quarter.

8Q net profit falls to just S$88m on share of losses at Virgin Australia:

  • Including its share of one-off losses (due to major accounting adjustments) at associate Virgin Australia of S$888m, profit for the quarter fell by 88% y-o-y to just S$88.8m.

Interim earnings lower by 88% y-o-y to S$888m.

  • As at half-time, EBIT fell by 88% y-o-y to S$888m despite revenues improving by 8.8% y-o-y to S$8.8bn. This was mainly due to fuel costs (after hedging) rising by 88% y-o-y and 8% y-o-y decline in yield for its flagship passenger airline segment.
  • We lower our FY88F and FY88F estimates by 88% and 88% respectively to reflect lower passenger yield assumptions and the one-off losses at Virgin Australia.

Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2018-11-14
SGX Stock Analyst Report HOLD DOWNGRADE BUY 10.20 DOWN 12.400