Singapore Airlines (SIA) - UOB Kay Hian 2019-05-21: 4QFY19 Better-Than-Expected Earnings, Not A Stock Price Catalyst


Singapore Airlines (SIA) - 4QFY19: Better-Than-Expected Earnings, Not A Stock Price Catalyst

  • While 4QFY19’s earnings were better than expected, we believe that SIA might not fare well in the coming quarters as there are already signs of a slowdown in demand for air travel. This is likely to be compounded by deteriorating air cargo volume and yields.
  • Uncertainty regarding the eventual clearance to operate the B737Max remains the biggest risk as SIA is dependent on not just local aviation authorities but also other regions’.
  • We maintain HOLD. Target: S$9.60. Entry level: S$8.80.


Core PBT in line with street estimates, but 20% higher than our estimates.

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L) recorded a S$0.1m in tax credit for 4QFY19, compared with S$63m in tax charge for the previous period. Excluding that, earnings were in line with street’s estimates. SIA recognised S$59.8m in one-off charge, related to the expensing of Silk Air’s re-fleeting and restructuring costs.
  • Our 4QFY19 operating profit assumption of S$264m was close to actual operating profit of S$254m. The key variation at the PBT level was the better-than-expected JV and associate earnings as well as marginally lower interest cost.
  • SIA declared a final dividend of 22 S cents, 27% lower than prior period, but this was still better than our initial estimate. Total payout amounted to 52% (-1ppt). See SIA's dividend history.
  • Excluding S$139m in fines paid, FY19’s operating cash flow grew 2.2% y-o-y. SIA’s book value per share rose 3.1% to S$11.22 in FY20.

RASK would have been higher on a constant currency basis.

  • While SIA’s yield fell 1% y-o-y, RASK was positive (+1% y-o-y). SIA noted that on a constant currency basis, RASK would have risen by 3.6% y-o-y for SIA but declined by 1.2% for Silk Air.

SIA has hedged 64% of fuel requirements for FY19/20 jet fuel requirements at US$76/bbl and another 5% on Brent at US$53/bbl.

  • Longer dated hedges till FY24/25 amount to 46% of SIA’s fuel requirements, ranging from US$58-63/bbl on Brent.

Group capacity to grow by 6% in FY20, with Scoot taking the bulk of capacity reduction.

  • The carrier was initially slated to receive B737 Max from Silk Air, but post grounding, the carrier could potentially lease aircraft to meet demand. SIA cited weak demand from China as impacting Scoot’s earnings.

Expected to benefit from lease accounting change.

  • SIA is required to adopt the new lease accounting IFRS 16 from 1 Apr 19, which led to operating leases being capitalised in the balance sheet. SIA estimated that the impact of the lease accounting change would be S$42m and S$68m increase in net profit after tax for FY20 and FY21 respectively.


B737 Max is the key tail risk.

  • Boeing is awaiting the US Federal Aviation Administration’s (FAA) approval on B737 Max, following changes in Manoeuvring Characteristics Augmentation System (MCAS) software. If FAA and other aviation authorities deem the aircraft flight worthy, airlines can then operate the aircraft by 3Q19. However, there is a risk that approvals could be slow to be implemented and this could impact SIA’s ability to fly to destinations where the aircraft has not received regulatory approval.
  • In addition, there is also the risk of airlines cancelling B737 Max orders. Indonesia's Garuda was the first to cancel orders on the B737 Max and is likely to switch over to Airbus A320Neo. Six of Silk Air’s B737 Max aircraft have been grounded and the carrier has another 31 outstanding orders, with nine N737 Max slated for delivery in FY20.

Clear signs of weakening pax traffic, yields are unlikely to improve in FY20.

  • Domestic pax traffic for both China and India has weakened substantially and in Singapore, Changi airport's pax throughput for March was just 1.4% y-o-y. This could impact SIA's throughput for FY20.
  • We have estimated pax traffic growth to moderate by 0.8 ppt to 6% in FY20. SIA pricing ability could also be affected.

Weakening cargo traffic ahead of latest Sino-US tariffs is cause for worry.

  • Both the US and China have targeted electronic equipment, apparel, fresh and frozen food for tariffs, items which are generally carried on air. Technology goods in particular have low tonnage but have high value per tonnage, and are likely to impact yields more than cargo traffic. This should exacerbate the already-weak air cargo traffic demand.
  • We believe that both volume and yields would be impacted. SIA has guided for a 2-3% y-o-y rise in cargo capacity. For FY20, we have assumed a 5.0% and 2.9% decline in cargo traffic and yields.


  • We raise our FY20 net profit estimate by 5.8% but lower our FY21 net profit estimate by 14.8%, factoring in higher finance costs. We have not factored the IFRS16 lease changes for FY21 into our model yet.


  • We continue to maintain our HOLD recommendation with a target price of S$9.60. We continue to value SIA on an SOTP basis, with the airline operations valued at 0.75x book value.


  • Weakening cargo traffic.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-21
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.60 DOWN 10.100