Singapore Airlines - UOB Kay Hian 2019-10-17: Broad-based Improvement In Load Factors Could Lift 2QFY20 Results

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

Singapore Airlines - Broad-based Improvement In Load Factors Could Lift 2QFY20 Results

  • 2QFY20 pax load factor improved across the group and this suggests that operating profit could improve q-o-q and y-o-y even after factoring in weak cargo traffic for the period. However, bottom-line could still be dragged by weak associate earnings.
  • We expect Singapore Airlines (SGX:C6L) to trade in a narrow range at S$9.00-10.00 over the next three months.
  • Maintain HOLD. Target price: S$9.50.
  • Suggested entry price: S$9.00.



WHAT’S NEW


Broad-based improvement in 2QFY20 across all operating units except for SIA Cargo.

  • In 2QFY20, pax load factor (PLF) for the parent airline and Scoot improved y-o-y as traffic growth outpaced capacity expansion. Traffic growth of the group gained momentum in Sep 19, accelerating 1.6ppt y-o-y to 8.7%.
  • Parent airline’s PLF was the highest September data in more than a decade, which suggests that the carrier could have gained from diversionary traffic out of Hong Kong.
  • SilkAir’s 2.9ppt y-o-y improvement in PLF was mainly attributed to capacity cuts.

Stronger load factors suggest potential q-o-q improvement in operating profit.

  • In 1QFY20, the parent airline recorded operating profit of S$232m (+28.2% y-o-y) despite a 4.4% y-o-y decline in cargo traffic and a 4.2% y-o-y decline in cargo yield.
  • For 2QFY20, the parent airline’s load factorimproved 2.7ppt q-o-q. Thus, there is a strong possibility that the parent airline’s 2QFY20 operating profit could improve y-o-y (1QFY20: S$181m) and q-o-q. The same goes for SilkAir and Scoot, where improved PLF could lead to lower q-o-q losses assuming yields remain flat.
  • Average jet fuel price for 2QFY20 was also about 4% lower q-o-q and thus suggests a q-o-q improvement in operating profit is highly likely.

Cargo traffic extended its fall in 2QFY20, albeit at a slower pace in September.

  • In 2QFY20, cargo traffic declined 8.5% y-o-y, leading to a 5.3ppt y-o-y deterioration in load factor, with capacity remaining flat. While not a surprise, 3QFY20’s rate of decline in cargo traffic could slow down due to a low base.


STOCK IMPACT


Remain neutral on SIA. SIA may fare well at the operating level but we are uncertain on earnings from airline associates.

  • In 1QFY20, Singapore Airlines recognised S$31m in losses from Virgin Australia. We believe Singapore Airlines recapitalised VA in 1QFY20 and thus is likely to recognise any incremental losses. Air Vistara, (49% owned by Singapore Airlines) which commenced international operations in August, could similarly be in the red.
  • In FY19, the carrier reported a loss of some S$160m.


EARNINGS REVISION/RISK

  • None.


VALUATION/RECOMMENDATION

  • Maintain HOLD and fair value of S$9.50. Recommended entry level is near S$9.00.


SHARE PRICE CATALYST

  • Strong 2QFY20 earnings.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-10-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 SAME 9.500



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