Singapore Airlines (SIA) - UOB Kay Hian 2019-08-23: Weak Cargo Traffic Could Be Offset By Strong Underlying Pax Demand


Singapore Airlines (SIA) - Weak Cargo Traffic Could Be Offset By Strong Underlying Pax Demand

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)’s July pax traffic growth and load factors are still robust, indicating strong underlying pax demand. We remain hopeful that the incremental pax revenue and profits could offset the decline in cargo profitability.
  • SIA, meanwhile, is trading at a 4- year low P/B multiple of 0.7x but dividend yield is not compelling.
  • Maintain HOLD. Target price: S$9.50. Suggested entry price: S$8.70.


Parent airline continues to register high-single-digit traffic growth as pax load factor (PLF) stays flat in Jul 19.

  • Ytd in FY20, pax traffic has risen by 8.6% with load factors rising by 1ppt. This underscores strong underlying demand for travel. In July, load factors in the Europe sector remained high at 90%, which holds strong premium cabin load factors.
  • Load factors however were weak for East Asia, the Americas and South West Pacific in July and conversely, we estimate that back-end yields for these markets would have been soft. These regions accounted for 33%, 14% and 20% of total passenger revenue respectively for SIA in FY19.

Cargo traffic and load factors continued to decline, but in-line with our full-year estimates.

  • July’s 5.7% y-o-y cargo traffic decline was worse than 1QFY20’s 4.4% y-o-y decline. Load factor for Jul 19 was the lowest in more than 10 years, implying both declining demand and excess capacity. Ytd, cargo traffic has declined by 4.7%, while we have estimated a 5.5% decline.

SilkAir’s higher PLF in July holds scope for lower losses for 2QFY20.

  • SilkAir’s July PLF improved by 3.2ppt to 80% on the back of capacity reduction of 1.7% y-o-y. In 1QFY20, SilkAir incurred a S$16m loss on a load factor of 78.1%. If load factors sustain above 80% in 2QFY20, losses are likely to be lowered.

Scoot’s July PLF still stands strong at 86.9% despite flattish yoy change.

  • Load factors however were weak for West Asia and East Asia in July as demand growth fell short of capacity injection. The capacity expansion was partly due to the transfer of two new routes from SilkAir. Comparing to 1QFY20’s PLF of 86.1%, the higher July PLF suggests that the management has been effective in adjusting capacity in response to slowing pax demand.


Net trade-off between higher pax traffic and lower cargo traffic is still likely to register incremental revenue.

  • In 1QFY20, parent airline revenue grew by S$260m on 9% y-o-y traffic growth, while cargo revenue declined by S$45m on a 4.4% y-o-y decline in traffic. While July’s pax traffic growth lagged 1QFY20’s, we believe that SIA will still be able to register incremental revenue for the period, provided yields do not deteriorate further.

Weak fuel prices could improve profitability.

  • Jet fuel price is trading near US$75/bbl and for ytd FY20, it has averaged US$79.5/bbl. The latter is lower than our full-year estimate of US$83.4/bbl. For the remaining 9 months, SIA had effectively hedged 73% of jet fuel requirements at US$76/bbl. For every US$5 decline in fuel price, SIA’s FY20 earnings would rise by S$78m, net of fuel hedging.


  • No change to our earnings estimates


  • Although SIA’s P/B (excluding SIA Engineering (SGX:S59)) is currently at a 4-year low of 0.7x, its relatively low dividend yield of 3.1% does not make the stock particularly compelling. We maintain our HOLD recommendation with our unchanged fair value of S$9.50.
  • We continue to value SIA on an SOTP basis, with the airline operations valued at 0.75x book value and SIA Engineering valued at S$2.55. We lower our suggested entry price to $8.70, which approximates a 10% total return to our target price.


  • Higher-than-expected cargo traffic and load factor.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-23
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 SAME 9.500