Singapore Airlines - CGS-CIMB Research 2019-02-15: Outlook For FY20F Has Improved On Cheaper Fuel


Singapore Airlines - Outlook For Fy20f Has Improved On Cheaper Fuel

  • SIA’s 9MFY3/19 core net profit made up 92% of our full-year expectations, which is in line as a typical 4Q is seasonally weak.
  • Maintain HOLD due to the tough competition, with an unchanged target price of S$10.25, based on 0.9x CY19F P/BV (1 s.d. below mean since 2001).
  • The outlook for FY20F is better, due to the correction in jet fuel prices since Oct 2018, and because the US$ is no longer likely to appreciate significantly.

Weak 3QFY3/19 due to high oil prices and strong US$

  • SINGAPORE AIRLINES LTD (SGX:C6L)’s 3QFY19 core net profit of S$284m was 25% lower y-o-y on the back of higher average jet fuel prices, and the depreciation of revenue currencies such as the A$, € and £, while the appreciation of the US$ pushed up operating costs.
  • Beyond the headline numbers, however, are some interesting dynamics. SIA mainline’s operating profits were rather flat y-o-y; while cost per available seat km (CASK) growth exceeded revenue per available seat km (RASK) expansion due to fuel cost increases and possible start-up losses of the non-stop A350-900ULR flights to the US that began in Oct and Nov 2018, SIA mainline may have seen growth in some non-ticket incomes.
  • SIA group switched to a new revenue management system in CY17 and over the past five quarters had managed to increase SIA mainline’s RASK y-o-y by stimulating a large rise in demand and passenger load factor (PLF) by lowering yields, although CASK growth stole its thunder.

Group passenger airlines generally saw profits contract

  • SilkAir and Scoot’s operating profits fell significantly y-o-y in 3QFY19, but again, there are interesting nuances.
  • SilkAir, which had an over-ambitious expansion plan, saw its RASK fall y-o-y over 12 quarters to 2QFY19, but managed to engineer 1.2% growth in RASK in 3QFY19 when its capacity expansion stopped. Unfortunately, this was not sufficient to cover a 4.9% rise in CASK.
  • Scoot’s PLF fell 3.6% pts y-o-y in 3QFY19, the first in seven quarters. This may be partly due to the negative demand reaction from the hike in Changi airport tax from 1 Jul 2018, causing its RASK to drop 5.8% y-o-y vs. 8.3% rise in its CASK.

Cargo business seeing emerging weakness

  • The momentum for cargo demand and yield improvements have weakened as we progressed to Dec 2018, hence in 3QFY19, SIA’s cargo business failed to deliver growth to its revenue per unit of available freight tonne km (AFTK) capacity for the first time in the eight quarters. Its cargo’s unit profitability shrank y-o-y for the first time in 10 quarters.
  • Refer to the PDF report attached for comparison of respective operating metrics. 

The earnings outlook for FY20F may be better

  • Lower oil prices should benefit FY20F earnings, based on an average all-in jet fuel price assumption of US$78.5/bbl for FY19F, and US$76.5/bbl for FY20F (inclusive of hedging gains). This reflects average spot jet fuel price assumptions of US$82/bbl and US$75/bbl, respectively. However, the increasingly-apparent cyclical weakness in cargo demand may offset some of the gains from cheaper fuel prices.
  • We have not reflected potential earnings enhancements from the transfer of 14 x 737-800 narrowbody aircraft and regional routes from SilkAir to Scoot (to be effected between Apr 2019F and Jun 2020F).

Upside risks to our call:

  • Lower-than-expected oil prices, depreciation of the US$ as a result of a potential pause in the US Federal Funds Rate increases, and improved group profits once the 737-800 planes are transferred from SilkAir to Scoot.

Downside risks:

  • Larger-than-expected start-up losses from its ultra long range (ULR) services as a result of low, promotional yields or lower-than-expected load factors.

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-15
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.250 SAME 10.250