Singapore Airlines (SIA) - OCBC Investment 2019-11-07: Weak Cargo; Strong Passenger Traffic

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Weak Cargo; Strong Passenger Traffic

SINGAPORE AIRLINES (SGX:C6L)'s 2QFY20 revenue grew 3.9% y-o-y to S$4.2b, largely driven by strong pax traffic growth, but dragged by weak cargo revenue. See Singapore Airlines Announcements; Singapore Airlines Latest News
Expenditure rose 4.7% y-o-y to $4.1b, on the back of higher non-fuel expenditure (+6.0% y-o-y) due to expansion in operations.
Net fuel cost was up 1.7% y-o-y due to higher volume uplifted on capacity expansion. As such, operating profit fell 8.6% y-o-y to S$213.1m.
Net profit grew 68% y-o-y to S$94.5m, as associates and joint ventures’ showed improvement in results (mainly from Virgin Australia) with losses narrowed from S$117.6m to S$39.8m in 2QFY20. The growth was partially offset by higher net finance charges (+1.6% y-o-y), due to the adoption of IFRS 16 Leases and additional financing for fleet renewal and expansion.

Passenger growth was strong in 2QFY20 across all airlines, with record 2Q and 1HFY20 pax load factor (PLF). Operating performances of the airlines were generally helped by higher traffic growth but dragged by higher expenditures (largely from non-fuel costs), which in turn led to operating loss of S$3m (flat y-o-y) and S$36m (vs S$11m in 2QFY19) for SilkAir and Scoot respectively, as well as lower operating profit (-1.7% y-o-y ) for SIA parent airline.
Singapore Airlines parent airline and SilkAir saw improvements in RASK in 1HFY20, showing that the recovery is on track. SilkAir was adversely affected by the transfer of routes to Scoot as well as the 737 Max grounding, yet it managed to drive growth in revenue, boosted by traffic growth of 3.1%.
Scoot’s traffic grew more rapidly at 7% as it was able to capture more routes from SilkAir. Management noted the challenges to build the brand name in new routes and the lingering issues with SilkAir’s Rolls-Royce engines but believed that they are transitional issues.

Passenger bookings in the coming months remain healthy and are expected to be stronger y-o-y, particularly driven by the long-haul flights to US. We expect the flown revenue to remain the key growth driver and higher revenue contribution from KrisShop in 2HFY20. However, cargo revenue remains a concern and rising expenditure may be a short-term drag, given Singapore Airlines’s strategy to grow in capacity with 159 outstanding aircraft deliveries to support fleet renewal and expansion.
Nonetheless, we believe that this is beneficial to the Group in the long run. The new aircrafts could improve fuel efficiency by 26-30% and also give the Group the capability to operate into new markets such as the long haul market.
After adjustments to factor in the weak cargo and higher expenditure, our fair value decreases from S$11.02 to S$10.46. See Singapore Airlines Share Price; Singapore Airlines Target Price.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-11-07

SGX Stock Analyst Report BUY MAINTAIN BUY 10.46 DOWN 11.020