Singapore Airlines - UOB Kay Hian 2019-08-01: 1QFY20 Decent Results, But Risks To Passenger Demand Could Come Sooner Than Expected

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

Singapore Airlines - 1QFY20: Decent Results, But Risks To Passenger Demand Could Come Sooner Than Expected

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)’s 1QFY20 net profit came in within our expectation but non-operating profit suffered steep losses arising from provisions on associate Virgin Australia.
  • The parent airline’s better-than-expected operating profit was mainly due to a lower-than-expected decline in cargo yield (-4.2% y-o-y).
  • SIA is upbeat on near-term prospects, citing strong passenger forward bookings against capacity growth.
  • Maintain HOLD. Target price: S$9.50. Entry price: S$9.20.



1QFY20 RESULTS

  • Earnings below expectation as SIA recognises loses on 20%-owned Virgin Australia. Operating profit was in line with our estimate of S$205m but non-operating earnings surprised on the downside as SIA estimated a significant loss provision on associate Virgin Australia. 1QFY20’s earnings amounted to 15.9% and 13.2% of our and the street’s full-year estimates. SIA’s book value stood at S$10.65 per share, down 5.1% from Mar 19, due mainly to the adoption of lease accounting.
  • Parent airline operations were stronger than expected as extent of decline in cargo yield was lower than expectation. (-4.2% vs -5.8% estimate). Pax yield improved and was in line with estimates, rising by 1%. Earnings would have been even higher for the parent airline if not for an additional S$15.4m in D&A that was recognised, due to changes in the residual value estimates.
  • Operating cash flow after working capital rose by 27.6% yoy to S$842m, registering a decent margin of 20.5%.
  • Silk Air S$16m loss, largely due to 1.6% decline in capacity, which was in turn due to the grounding of B737 Max aircraft, while weak yields (-2.9% y-o-y) led to a S$10m revenue shortfall.
  • Scoot reported a S$36m loss as other operating revenue (presumably leases to Nok Scoot) fell by S$10m and due to a 1.8% y-o-y decline in pax yield, coupled with a 3.9% y-o-y rise in unit cost.
  • SIA has hedged 70% of fuel requirements for FY19/20 jet fuel requirements at US$76/bbl and another 5% on Brent at US$52/bbl. Longer dated hedges till FY24/25 amount to 46% of SIA’s fuel requirements, ranging from US$58-63/bbl on Brent.


STOCK IMPACT

  • Decent results, notwithstanding losses at Virgin Australia; SIA is also upbeat on near term prospects. The carrier noted that “passenger bookings in the forward months are tracking closely against capacity growth, supported by premium cabin traffic to key markets”.
  • Still, SIA noted that a weakening air freight environment could eventually “cloud the outlook for passenger demand”. We share SIA’s concerns though we believe that the risk to passenger traffic could be sooner, given Singapore’s own weakening economic environment.


EARNINGS REVISION/RISK

  • No change to our forecasts.


VALUATION/RECOMMENDATION

  • We will provide further information, post an analyst briefing. For now, maintain HOLD and target price of S$9.50.


SHARE PRICE CATALYST

  • Unclear at this stage.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-01
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 SAME 9.500



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