Singapore Airlines - CGS-CIMB Research 2019-08-01: Okay For Now, But Darker Clouds On The Horizon


Singapore Airlines - Okay For Now, But Darker Clouds On The Horizon

  • At today’s analyst briefing, SINGAPORE AIRLINES (SIA, SGX:C6L) said that passenger demand for the mainline carrier remained robust, with premium cabin yields holding steady.
  • The carrier is monitoring negative momentum in macroeconomic indicators, including airfreight weakness, that may portend a turn in the aviation cycle.
  • Maintain HOLD, with an unchanged target price of S$10.04, still pegged to P/BV of 0.9x (1 s.d. below mean).

Keeping our HOLD call despite today’s share price sell-off

  • Singapore Airlines (SIA) hosted a briefing for analysts this morning, and this briefing note is best read in conjunction with our results report issued earlier today, where we downgraded our core EPS forecasts by 16-18% and reduced the target price to S$10.04. See Singapore Airlines - CGS-CIMB 2019-08-01: Share Price Constrained By Mixed Outlook.
  • We noted in our results report that SIA was not a compelling investment case at Wednesday’s closing price of S$9.67, but after the sell-off today, SIA is once again closing in on its trough P/BV valuation of 0.8x, or S$8.93, which is just 3% lower than the current SIA share price. Nevertheless, we are not upgrading our call to an Add, because the earnings momentum for SIA looks set to decelerate, given the ongoing cargo demand and yield weakness, and an expected delayed flow-through in the future to premium demand and yields.

SIA mainline doing well, but unsure how long this can last

  • SIA told analysts that conditions were hunky-dory for the mainline passenger carrier to-date, with premium demand and yields holding up, although economy class yields were under a bit of competitive pressure. Looking three months forward, no weakness has been detected, contrary to Cathay Pacific’s warnings of substantial pressure on long-haul passenger yields in the coming months. However, SIA is worried about the weakening global economic momentum indicators, which had preceded a weakening of business travel demand and yields in the past.
  • SIA is bearish on the outlook for its cargo business, as the US-China trade war has caused demand to fall while freighter capacity put in place during the cargo boom years of 2017-18 have remained in place, causing oversupply and continuing to put pressure on cargo yields.

SilkAir and Scoot may have some work to do

  • SilkAir’s grounding of its six 737 MAX 8 planes caused non-fuel operating costs to escalate, as it continues to depreciate the planes while generating no revenue from them. With multiple regulatory hurdles to clear, SilkAir was unsure when the planes could be reactivated, which means SilkAir’s financial performance might be lacklustre for a while yet.
  • Meanwhile, Scoot continues to face issues with the reliability of the Rolls-Royce TRENT 1000 engines powering its 787-9 fleet, which had caused lengthy flight delays in the last few months of 2018 and a fall-off at its Singapore point-of-sale. As a result, Scoot has been forced to curtail its aircraft utilisation by 15% or two hours a day, and set aside more spare aircraft, which impacted its planned capacity expansion.
  • Once the technical issues on the MAX 8 and TRENT 1000 engines are resolved, SilkAir and Scoot will be achieve their true long-term potential.
  • See attached 15-page PDF report for complete analysis and outlook of SIA mainline, SilkAir, Scoot, SIA Cargo.

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.040 SAME 10.040