Singapore Airlines (SIA) - Maybank Kim Eng 2019-02-18: 3QFY19 Below Due To Tax, But Things Are Under Control


Singapore Airlines (SIA) - 3QFY19 Below Due To Tax, But Things Are Under Control

3QFY19 results update: Business is good

  • As usual, SINGAPORE AIRLINES LTD (SGX:C6L, SIA)'s management provided a cautious outlook during the 3QFY19 analyst briefing. However, the undertone is they have passed the worst and there are just a few tweaks needed.
  • The parent airline and cargo business is operating well, whereas the regional short haul suffers from overcapacity and a sudden fall-off of Chinese tourists.
  • We are confident Singapore Airlines will meet our FY19E. Re-iterate BUY and Target Price of SGD11.20 (0.94x FY19F P/BV — its 10-year mean).

Outlook is tricky and challenging

  • The industry is very volatile at the moment due to uncertainty over US-China trade war. This has caused a sudden shift in consumer behaviour, especially business travel and Chinese tourists. Overcapacity looms on certain routes due to this as airlines have yet to adjust their capacities.
  • In Singapore Airlines’s case, routes within the ASEAN region, as well as to China and India are impacted. Otherwise, Singapore Airlines has achieved its first growth in passenger yields since 2016, which indicates the bottom has been reached.

Oil-price risk well managed

  • Singapore Airlines’s fuel hedge provided net savings of SGD102m in 3QFY19. For 9MFY19, it had net savings of SGD386m.
  • Singapore Airlines has hedged 80% of its 4QFY19 fuel requirements at USD74/bbl, which is slightly lower than the current market price. This will enable Singapore Airlines to price its inventories more effectively and precisely as compared to its competitors that are mostly lightly hedged or entirely on the spot market.

The best risk-reward among Asian carriers

  • We like Singapore Airlines for its modest capacity growth strategy, which should enable it to manage yields relatively better than its competitors. Its fuel hedge reduces operating risk significantly and greatly safeguards positive margins going forward.
  • Furthermore, its sub 5% dividend yield is attractive compared to other carriers and the STI.

Updates from analyst briefing

Passenger demand matches supply

  • The Group was able to fill up its seats fairly well in 3QFY19, as exhibited by the record load factor of 82.8%. The keyword is active capacity management and selling promotional seats well ahead of time. Furthermore, Singapore Airlines is very clinical in adding capacity and quick to make adjustments based on passenger demand.
  • Management indicated that the near-term outlook is pretty encouraging and expects a high level of passenger load factor. The areas that are under pressure are the short-haul and budget segment. These business segments are facing overcapacity on certain routes and this is putting pressure on yields.

Cargo still going strong, but dark clouds ahead

  • The cargo business is performing well. The Group managed to achieve high-single-digit yield growth, albeit at flat volumes. The US-China trade war spat has created a new level of uncertainty and many cargo shippers have abandoned long-term schedules for one-time consignments. The industry still has pricing power for now as most of the tariffs imposed are not on goods shipped via air and therefore largely unaffected.
  • However, should a new tariff encroach into high-value and time-sensitive cargos, this can quickly diminish air cargo carriers’ pricing power. The situation is very volatile and nobody could put their finger on what would be the next rendition between the US-China trade war episodes.

Making good progress on yields

  • The graphs below show the yield movement of the passenger and cargo businesses since FY12. We are encouraged by the performance in 3QFY19, as Singapore Airlines was able to achieve respectable yield growth despite a challenging operating environment. We believe the momentum will continue into FY20 and this should help to boost profits and cash flows.

Risk adverse approach on fuel

  • Singapore Airlines has hedged 80% of its 4QFY19 fuel requirements at USD74/bbl, which is slightly lower than the current market price of USD78. For FY20, it has hedged 69% of its fuel requirements at levels below current market prices. Management highlights that it will actively sought more fuel-hedging exposure should the market present itself with opportunities.
  • Singapore Airlines has the second highest fuel-hedge coverage ratio among the Asia Pacific carriers. This is proving to be a great advantage as it has locked in the fuel price at attractive levels. This also enables Singapore Airlines to sell its tickets longer into the future as the risk profile has been significantly reduced.

Mohshin Aziz Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-02-18
SGX Stock Analyst Report BUY MAINTAIN BUY 11.200 SAME 11.200