Singapore Airlines Briefing Takeaways - UOB Kay Hian 2019-08-02: Pax Yields Still Holding Up, Underpinned By Robust Premium Demand

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

Singapore Airlines Briefing Takeaways - Pax Yields Still Holding Up, Underpinned By Robust Premium Demand

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L) highlighted that on a currency adjusted basis, pax yields rose 3% y-o-y, underpinned by strong premium loads and yields. The key uncertainty is when or if this will reverse.
  • For now, SIA is positive on yields, which implies that at least for the next 3-4 months yields should be supported. Aside from a weak cargo environment, escalating staff costs and a deteriorating earnings outlook for Virgin Australia are key risks.
  • Maintain HOLD. Target Price: S$9.50. Entry price: S$9.10.



WHAT’S NEW


Earnings would have been flat were it not for S$31m in losses recognised from Virgin Australia (VA).

  • Virgin Australia had guided that it will recognise S$160m in losses for 2H19 (June year-end). Singapore Airlines (SIA) subsequently recognised roughly S$31m in losses for the quarter, reversing 4QFY19’s profit estimate as well. Were it not for that, PBT and net profit would have been flat y-o-y.

On a currency adjusted basis, SIA’s pax yield would have risen by 3% yoy,

  • underpinned by strong premium loads, higher proportion of premium seats and improved pricing on premium cabins. This offset the yield pressure on the back end.
  • Weakness in the AUD, GBP, Euro and IDR had a negative impact on pax yields for 1QFY20.
  • SIA noted strong demand for premium cabins on Asia-Southwest Pacific regions but intra-Asia, particularly North Asia, faced pressure on the backend cabins, due to excess capacity.

Staff cost rose a whopping 14% yoy (+$90m), well ahead of the 6.6% yoy rise in pax capacity.

  • Part of this was due to the completion of a collective agreement with pilots, while SIA also awarded performance bonuses pegged on improved pax load factor.

Scoot’s S$37m operating loss was mainly due to a reduction in block time utilisation hours.

  • Given negative publicity over the delays in the prior quarter, Scoot had reduced the utilisation in the current quarter by 2 hrs to 9hrs in comparison to 4QFY19. This, along with lower yields and weaker demand out of Singapore led to the steep losses in 1QFY20. Comparatively, Scoot reported a loss of S$6.0m in 4QFY19.

SIA not optimistic on cargo recovery but impact to bottom line appears to be muted.

  • SIA noted that there was excess capacity across the region and yields are likely to remain weak. Still, cargo revenue fell by just S$44.6m in 1QFY20 vs a S$258m rise in pax flown revenue. The net impact at the operating level, was a S$52m increase in operating profit for the parent airline operations.


STOCK IMPACT

  • Key uncertainty is the extent to which pax demand could slow down amid the current weak environment. We have assumed a 1% y-o-y rise in pax yield but still expect core net profit to decline by 21.8% y-o-y.


EARNINGS REVISION/RISK

  • We have lowered our FY20 net profit assumption by 4.2%, after factoring in higher staff cost and losses from Virgin Australia.


VALUATION/RECOMMENDATION

  • We continue to value SIA on an SOTP basis by valuing the airline operations at 0.75x P/B and SIA Engineering (SGX:S59) at our fair value of S$2.55.
  • We however lower our recommended entry price to S$9.10.


SHARE PRICE CATALYST

  • None.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-02
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 SAME 9.500



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