Singapore Airlines - CGS-CIMB Research 2019-08-01: Share Price Constrained By Mixed Outlook


Singapore Airlines - Share Price Constrained By Mixed Outlook

  • SIA's 1QFY3/20 core net profit made up 13% of our/consensus previous forecasts, underperforming expectations due to SIA’s share of Virgin Australia’s losses.
  • Maintain HOLD as we see cyclical headwinds from slowing global trade growth, potentially affecting both premium-cabin travel and cargo volumes.
  • Our target price is still based on 0.9x CY19 P/BV (1 s.d. below mean), but lowered to S$10.04 on the back of reductions in our earnings forecasts .

Highlights of 1QFY3/20

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)'s 1QFY20 core net profit of S$108m was 20% lower y-o-y, due mainly to the swing in associate and JV contributions from share of profits in 1QFY19 to a share of losses in 1QFY20, which in turn, was caused by an unfavourable swing to losses at Virgin Australia, partially offset by an improvement in Vistara’s performance. Taking that aside, last quarter’s EBIT was flattish y-o-y, with an operating profit improvement at
    1. SIA mainline’s passenger business and at
    2. SIA Engineering (SGX:S59), largely offset by
    3. lower cargo profits, and
    4. losses at SilkAir and Scoot (vs. breakeven for the latter two airlines in the prior year).

Main pax airline doing well, less so for SilkAir and Scoot

  • SilkAir grounded its fleet of six 737 MAX 8 planes on 12 Mar 2019, and 1QFY20 reflected the first full quarter of that impact with an EBIT loss of S$16m, vs. breakeven last year. Costs related to the grounding and loss of revenue from the subsequent reduction of capacity contributed the majority of the loss. This was partly compensated by SilkAir’s third-consecutive quarter of y-o-y RASK increase as passenger demand and loads responded positively to lower yields. The efforts to improve RASK are important because SilkAir had over-expanded by growing ASK capacity 36% over the past four years, which led to a 15% RASK decline over that same period.

Is there a case to accumulate SIA shares?

  • During our recent marketing trip to Singapore, many investors asked if there was a case to accumulate SIA shares. At its recent low of S$9.06 on 4 Jun, SIA was certainly very attractive, trading at its trough valuation of 0.8x P/BV, but at the current share price of S$9.67, the upside is no longer so compelling, in our view. See SIA share price history.
  • Cathay Pacific recently warned of “intense market competition” that “continued to exert pressure on yield” especially on long-haul flights. SIA also noted that trade disputes and softer airfreight demand has clouded the outlook for passenger demand over the longer term.


  • Our HOLD call is premised on weakening global GDP growth and higher tariffs that are now beleaguering the US-China trade and have been negatively affecting SIA’s airfreight demand and yield since late-CY18. There is a historical lagged correlation between cargo demand and demand for premium-cabin and business-related travel, which pose a downside risk.
  • Upside risks include the potential for SilkAir to rethink its long-term capacity growth by renegotiating the 737 MAX 8 orders with Boeing.

Raymond YAP CFA CGS-CIMB Research | Calyne TI CGS-CIMB Research | CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.04 DOWN 10.140