Singapore Airlines - CGS-CIMB Research 2019-01-23: 3QFY3/19F Results Likely To Be Weak


Singapore Airlines - 3QFY3/19F Results Likely To Be Weak

  • We expect SIA’s upcoming results release on 14 Feb to be unexciting, as the headwinds experienced in 2Q continued to persist until end-CY18.
  • Having said that, the outlook for FY20F has improved due to weaker jet fuel prices, and we upgrade our core net profit forecasts accordingly.
  • Maintain HOLD with a slightly higher target price of S$10.25, still based on 0.9x CY19F P/BV, 1 s.d. below mean since 2001.

Recap: why 2QFY19 core net profit was 40% lower y-o-y

  • SINGAPORE AIRLINES LTD (SGX:C6L) delivered 2QFY19 core net profit that was 40% lower y-o-y on the back of higher oil prices, and the depreciation of the A$, €, and £ where SIA is net long, and the appreciation of the US$, where SIA is net short. These factors more than offset stronger cargo earnings, and masked SIA mainline’s and Scoot’s successful revenue management efforts (that raised revenue per unit of ASK capacity by lowering ticket prices to stimulate an elastic demand response).

Similar headwinds for the upcoming 3QFY19F results

  • During the Oct-Dec 2018 quarter, we estimate that SIA’s all-in jet fuel prices (inclusive of hedging gains) averaged US$82/bbl, which was higher than the US$72/bbl average in 3QFY18 and also higher than the US$80/bbl of the immediately preceding 2QFY19.
  • While spot oil prices had dropped sharply from early-Oct 2018, airlines’ jet fuel prices generally lag by one month, so the average for 3QFY19 captured the steep rise in spot oil prices during Sep 2018. Also, the currency trends seen during 2QFY19 continued to play out during 3QFY19. As such, we expect SIA’s core net profit to be weaker y-o-y.

Several additional factors may negatively impact 3QFY19F results

  • In addition, SIA may report start-up losses for its non-stop A350-900ULR flights to Newark, Los Angeles and San Francisco, which started in Oct and Nov 2018. Initial promotional fares are likely loss-making, and the premium economy cabin saw low take-up in the initial period.
  • Furthermore, Scoot saw its load factor drop 3.6% pts y-o-y in 3QFY19F, the first time in seven quarters, which may be partially due to the negative demand reaction from the hike in the Changi airport tax from 1 Jul 2018.
  • Finally, the cargo business saw the volume of weight carried contract y-o-y for the first time in six quarters, with a larger drop during the month of Dec 2018, reflecting the global slowdown in GDP and trade growth and the softening of the business cycle.

The earnings outlook for FY20F may be better

  • Lower oil prices should benefit earnings in 4QFY19F and FY20F, and we have cut our average FY19F all-in jet fuel price assumption from US$80.2/bbl to US$78.5/bbl, and for FY20F from US$83.4/bbl to US$76.5/bbl. The jet fuel price assumption changes have been reflected in our new core EPS estimates.
  • However, we have not reflected potential earnings enhancements from the upcoming transfer of 737-800 aircraft and routes from SilkAir to Scoot, which should enhance the profitability of the group as a whole.
  • Refer to the PDF report attached for further analysis and valuation details. 

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.25 UP 10.100