Singapore Airlines (SIA) - Maybank Kim Eng 2019-01-24: Time To Be Positive, Upgrade To BUY


Singapore Airlines (SIA) - Time To Be Positive, Upgrade To BUY

Lower risk with decent earnings growth potential

  • Upgrade SINGAPORE AIRLINES LTD (SGX:C6L) to BUY from HOLD and raise Target Price 14% to SGD11.20 as we raise P/B multiple to the historical avg. from 1SD below due to lower risks to growth. Our revised Target Price is based on 10-year P/BV mean of 0.94x vs. 0.82 previously.
  • We estimate 3QFY19 (out Feb-19) core net profit of SGD316m (+14% y-o-y, +80% q-o-q). 3QFY19’s overall load factor eased by 0.3ppt y-o-y and q-o-q to 76.1% and we expect yields to continue its downtrend (-1.1% y-o-y), but lower fuel price (-3% q-o-q) has more than offset this.
  • We raise SIA's FY19-21E earnings by 33%, 37% and 17% respectively to factor in lower fuel price, better yield outlook, its latest traffic-growth plans and USD/SGD estimates.

Doing a great job filling the capacity

  • Overall traffic (passenger + cargo) in 3QFY19 grew 3.9% y-o-y. Load factor receded by 0.3ppt y-o-y to 76.1%, which is still considered high by historical comparison.

Outlook has improved on strategy consolidation

  • We believe management’s strategy to consolidate Silkair into the parent airline is a wise decision. They have done this before with merger of Tigerair into Scoot with great success. This will create clear demarcation between the premium and budget segment.
  • We expect traffic growth momentum to slow going forward due to market maturity and based on management’s latest growth plans.
  • SIA has hedged up to 46% of its fuel needs up to FY23 at reasonable levels (USD57-64/bbl Brent), which provides some cost stability and lowers operating risk.

BUY SIA on low(er) risk and decent dividend yields

  • Our revised earnings forecasts are now above consensus. We think the market has not priced in SIA’s operational resilience and the benefit of a lower fuel-price environment. Furthermore, we are optimistic its efforts to consolidate operations will yield cost reductions.
  • Its dividend yields of > 4% are also attractive and above peer average.

Operating statistics

Traffic growth was healthy

  • Passengers carried by the Group grew by 6.3% y-o-y to 9.3m in 3QFY19. This is above its long-term average of 5% growth (excluding the Tigerair acquisition y-o-y comparison), which suggests passenger traffic growth was very healthy.
  • The growth in cargo carried shrunk marginally by 0.6% y-o-y in 3QFY19.

Load factor

  • The Group passenger load factor grew by 0.7ppt y-o-y to 82.8% in 3QFY19 (Oct-Dec 2018).
  • Cargo load factor was down by 2.3ppt y-o-y to 66.0% in 3QFY19. The cargo segment performed exceptionally well over the past three years but there has been a noticeable decline in 3QFY19’s performance.


Yields close to bottoming, in our view

  • Passenger yield has been on a persistent downtrend and it’s currently hovering at 15% lower than its historical average yield of SG11.8 cents/km. Cargo yield however staged a recovery back in FY17 and is currently hovering above its historical average yield of SG31 cents/ton.km.
  • Historical observations suggest that passenger yield tends to track cargo yield movement with a 2-3 year lag. If this trend repeats itself, it would suggest that the passenger yield downtrend is close to bottoming and could stage a recovery.

Mohshin Aziz Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-01-24
SGX Stock Analyst Report BUY UPGRADE HOLD 11.20 UP 9.800