Singapore Airlines (SIA) - CGS-CIMB Research 2019-05-17: Cyclical Headwinds Ahead?


Singapore Airlines (SIA) - Cyclical Headwinds Ahead?

  • SINGAPORE AIRLINES LTD (SGX:C6L)’s FY19 core net profit of S$845m was 33% above our expectations but 17% below Bloomberg consensus.
  • The outperformance was due to lower-than-expected operating costs, better JV and associate performance and the absence of tax expense in 4QFY19.
  • Maintain HOLD as we see cyclical headwinds blowing in. Our target price is lowered slightly to S$10.14, based on 0.9x CY19 P/BV (1 s.d. below mean).

Highlights of SIA's 4QFY3/19 and FY19

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)’s FY19 core net profit of S$845m was 15% lower y-o-y, with weaker performances at all the passenger airlines on the back of higher oil prices, partially offset by stronger cargo earnings as airfreight demand and yields were robust throughout most of FY19.
  • At the reported net profit level, SIA saw 48% y-o-y lower earnings, mainly due to SIA’s S$116m share of Virgin Australia’s deferred tax asset write-off in 2QFY19 and a S$60m charge for SilkAir’s refleeting and restructuring costs in 4QFY19, both of which we have classified as exceptional items.

Is emerging cargo weakness a sign of tougher times ahead?

  • SIA Cargo enjoyed two whole years of robust and rising profitability but the dynamics weakened considerably in the past half year. The cargo business suffered a 0.39 Scts unit loss in FY17, calculated as revenue per Available Freight Tonne Km (RAFTK) minus costs per AFTK, but this swung sharply to a 2.15 Scts unit gain in FY18 and a 3.31 Scts unit gain in FY19 on the back of global inventory restocking and efforts to front-load cargo exports to the US prior to the imposition of tariffs on Chinese exports during CY18.
  • However, in the past two quarters, the unit profitability has weakened. In 3QFY19, the cargo unit gain fell to 4.79 Scts (from 5.79 Scts a year ago), the first y-o-y drop in two years, and in 4QFY19, the cargo unit gain fell to 1.95 Scts (from 3.01 Scts a year ago). RAFTK also fell 6.2% y-o-y in 4QFY19 from zero y-o-y change in 3QFY19 and positive y-o-y momentum in the seven consecutive quarters preceding that.
  • With US inventories already bloated from the front-loading in CY18 and the rise in both US and Chinese tariffs from May/Jun 2019, we see headwinds for the global airfreight business, which may impact business and premium-class travel demand in the months ahead.

Scoot impacted by Chinese competition

  • For now, SIA reported that its premium cabin demand remained robust in the months ahead and growth in forward passenger bookings is tracking positively against capacity injection. We worry, however, that this prevailing cyclical strength may not last until the end of this financial year.
  • Meanwhile, Scoot saw its 2HFY18 EBIT of S$73m drop to a loss of S$5m in 2HFY19 on the back of higher oil prices as well as intensified competition with state-owned Chinese airlines that have introduced new capacity to ASEAN, just as outbound Chinese passenger traffic growth has slowed.
  • Conversely, SilkAir’s 4QFY19 EBIT improved y-o-y on lower fuel prices and its refleeting exercise to install lie-flat business class seats will improve its competitive position over time.
  • Upside risks to our call include SIA’s efforts to improve RASK (by triggering a more-than-compensatory increase in demand in response to lower yields) being more successful than expected.
  • Downside risks include higher-than-expected jet fuel prices and the heating up of the US-China trade war, which may affect demand for airfreight and eventually spill over into demand for business travel.

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | https://research.itradecimb.com/ 2019-05-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.14 DOWN 10.250