Singapore Airlines (SIA) - UOB Kay Hian 2019-06-19: Strong Pax Traffic But Cargo Traffic Declines For 9 Straight Months

SINGAPORE AIRLINES LTD (SGX:C6L) | SGinvestors.io SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Strong Pax Traffic But Cargo Traffic Declines For 9 Straight Months

  • SINGAPORE AIRLINES LTD (SGX:C6L)’s May traffic data showed nine consecutive months of decline in cargo, though the pace of decline narrowed in May. Given the steep 31% y-o-y fall in electronics NODX exports, we believe that air cargo yields would also have been soft.
  • Pax traffic though was better than expected, although this could have been partially due to a longer Vesak Day holiday and transfer of routes from Silk Air.
  • Maintain HOLD with a target price of S$9.50. Suggested entry level: S$8.60.



WHAT’S NEW - SIA GROUP MAY 19 OP STATISTICS


Pace of cargo traffic decline narrowed in May.

  • The 3.2% y-o-y decline in cargo traffic in May was an improvement from April’s 7.5% y-o-y decline. Singapore Airlines’s May data stands in contrast to the 15.9% y-o-y decline in NODX and a 31.4% decline in electronics exports over the same period. However, the discrepancy was due to the fact that Singapore Airlines’s cargo traffic is on a tonne-km basis and includes imports, while exports data are in dollar terms. Also, air cargo traffic is highly weighted towards electronics exports, which are relatively lighter and hence the decline in tonnage terms might not be significant.
  • Still, we believe that the weak demand is expected to lead to lower air cargo yields.
  • For FY20, we have estimated a 5.0% decline in cargo traffic and a 2.9% decline in cargo yield.

Cargo traffic declined for 9 straight months, while load factor fell for 7 consecutive months.

  • Cargo load factors declined by 2.2 ppt in May 19 and was broad based, except for the Americas, where loads were flat y-o-y. East Asia registered the highest decline of 3.8ppt in May. The relatively low cargo capacity additions in May imply that Singapore Airlines might have lowered freighter utilisation during the period.

Passenger traffic was surprisingly strong with a 9.5% yoy rise for May,

  • outpacing capacity growth to register a 1.1ppt rise in load factor. The stronger traffic could have been due to an additional day off for Vesak Day this year compared to 2018, and to a smaller extent, due to Singapore Airlines taking on some of Silk Air’s shorter haul routes that were previously served by the grounded B737 Max aircraft.
  • Singapore Airlines recorded strong load factors to Europe, South West Pacific and West Asia.

SilkAir’s 3.0% decline in capacity was due to the grounding of the B737 Max.

  • While pax traffic rose 0.9%, pax carriage actually declined by a whopping 6%.


STOCK IMPACT


Remain neutral on SIA. Ytd, SIA has underperformed the FSSTI by 8ppt.

  • We do not expect the status quo to change as the weak economic environment will likely impact both pax and cargo yields. On the back of this and higher interest cost on new debt, we expect FY20’s core net profit to decline 18% y-o-y.


EARNINGS REVISION/RISK

  • We have revised our FY20-22 net profit and balance sheet forecasts to incorporate IFRS16 or lease accounting by 4.5% and 4.5% respectively.
  • However, shareholder’s equity is expected to decline due to an increase in lease liabilities in comparison to right-of-use assets.


VALUATION/RECOMMENDATION

  • Maintain HOLD but we lower our fair value target price to S$9.50. We continue to value Singapore Airlines on an SOTP basis, with the airline and SIA ENGINEERING (SGX:S59) valued at S$2.55. See attached PDF report for SOTP details.
  • Suggested entry price remains at $8.60.


SHARE PRICE CATALYST

  • None.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-06-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 DOWN 9.600



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