Singapore Airlines (SIA) - OCBC Investment 2019-05-21: Returning To Trough Valuations


Singapore Airlines (SIA) - Returning To Trough Valuations

  • SIA's S$0.30 FY19 dividend as expected.
  • Most fuel needs hedged.
  • Undemanding valuations.

SIA's FY19 results within expectations

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L) reported a 3.3% y-o-y increase in revenue to S$16.3b and a 47.6% y-o-y fall in net profit to S$682.7m for FY19, dragged by higher fuel costs; the group had also recognised its share of losses (S$116m) arising from Virgin Australia’s non-cash accounting adjustments in prior quarters.
  • Results were within expectations as full year net profit was just 2% higher than our full year forecast.
  • SIA has declared a final dividend of S$0.22/share, bringing the full year dividend to S$0.30/share (vs. S$0.40/share a year ago), which was in line with our expectations, as per our earlier reports. (see: Singapore Airlines (SIA) - More People Are Flying)

69% of FY20 fuel needs hedged

  • Fuel cost headwinds may persist on supply risks in the oil market, but SIA’s significant fuel hedges will help to mitigate the effect of higher prices. For FY20, the group has hedged 64% of its fuel requirement in MOPS (Mean of Platts) and 5% in Brent at weighted average prices of US$75 and US$53 per barrel, respectively.
  • Longer-dated Brent hedges with maturities extending to FY25 cover up to 46% of the group’s projected annual fuel consumption, at average prices ranging from US$58 to US$63 per barrel.

6% passenger capacity growth in the year ahead

  • Issues related to the Boeing 737 MAX 8 fleet as well as the Rolls-Royce Trent 1000 TEN engines powering Boeing 787s have affected SIA Group’s passenger capacity growth, which is now expected to be 6% in the year ahead.
  • Going forward, growth in forward passenger bookings in the months ahead is tracking positively against capacity injection, with robust premium cabin demand. However, China’s international traffic growth rates have softened at a time of increased supply in the market.

Trading at 0.8x P/B

  • After rising 11% to its peak in end Feb 2019 since we upgraded to BUY in Oct last year, SIA's share price (as at 17 May) is down about 9% post the grounding of Boeing 737 Max 8 fleet and the recent market correction. SIA is now trading at about 0.8x P/B, close to trough valuations.
  • We maintain our BUY rating and fair value estimate of S$11.02 on SIA. See SIA's dividend history.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-05-21
SGX Stock Analyst Report BUY MAINTAIN BUY 11.020 SAME 11.020