Singapore Airlines (SIA) - UOB Kay Hian 2019-11-07: 2QFY20 Losses At Virgin Australia & Higher Opex Lead To 45% Decline In Core Earnings

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

Singapore Airlines (SIA) - 2QFY20 Losses At Virgin Australia & Higher Opex Lead To 45% Decline In Core Earnings

  • Post results briefing, we are less confident of an earnings recovery arising from higher capacity addition. SINGAPORE AIRLINES (SIA, SGX:C6L) guided cargo traffic to remain weak and it has cut cargo capacity. We also did not receive any assurance that costs are likely to stabilise in 2HFY20.
  • While we applaud SIA for its digital transformation and customer-centric initiatives, we are unsure to what extent this will boost bottom line.
  • Maintain HOLD. Target price: S$9.40. Entry price: S$8.70.



SIA's 2QFY20 RESULTS

  • Earnings below expectation amid continued losses from Virgin Australia and higher opex. SINGAPORE AIRLINES (SIA, SGX:C6L)’s 2QFY20 net profit at S$94.5m was sharply below our estimate. We had expected parent airline’s operating profit to rise 36% y-o-y but it declined 1.7% y-o-y in the quarter due to a steep 8.4% y-o-y decline in cargo yield. Scoot’s losses also rose more than three-fold amid a 7% y-o-y increase in opex for the period. However, the bulk of the earnings estimate variance was due to continued associate losses. SIA made a S$116m provision for Virgin Australia (VA) in the prior quarter. Excluding SIA Engineering (SGX:S59)’s consolidated associate, associate loss would have been S$67.5m, which implies continued losses at VA, Vistara or NokScoot. SIA declared an unchanged 8 S cent interim dividend. See Singapore Airlines Dividend History.
  • Earnings were also impacted by weaker cargo revenue; SIA not optimistic of cargo recovery in the next few quarters. In 2QFY20, cargo revenue declined by S$93m vs 1QFY20’s S$44.6m decline, impacting parent airline’s profitability. Going forward, SIA expects yields to remain depressed due to excess capacity and it will cut cargo capacity to - 1% from prior guidance of 2-3% growth.
  • Virgin Australia losses could be lower in 2HFY20. About half of Virgin Australia’s losses in 1HFY20 was due to impairment charges on VA’s international and Tigerair’s businesses. The carrier, which has a new management, announced domestic capacity cuts, 750 job cuts and cessation of flights to Hong Kong in a bid to boost profitability. SIA has also not injected additional capital into VA in 1HFY20.
  • Enhanced codeshare with Malaysian Airline System subject to regulatory approval and could take 9 to 12 months. SIA did not share much but said it would be a win-win situation for all.
  • SilkAir’s S$3m operating loss (unchanged y-o-y) was attributed to continued depreciation on six B737 Max aircraft along with preservation cost as well as S$6m in retrofit costs. SIA gave no indication of potential compensation arising from loss of revenue and related costs for the B737 Max aircraft.
  • 9.7% y-o-y rise in staff cost attributed to:
    • increase in head count;
    • higher crew allowances; and
    • profit-sharing bonuses on the back of higher operating statistics.
  • For 2HFY20, SIA has hedged 75% of jet fuel requirements at US$76/bbl and 3% on Brent at US$54/bbl.


STOCK IMPACT


Costs are rising faster than revenue; gearing is rising.

  • We were caught off-guard by the significant rise in opex but received no assurance that it will normalise. SIA took the unusual step to point out that its leverage (total debt/equity) has risen to 0.74x from 0.5x. This is not surprising as SIA recognised previous off-balance sheet leases. We estimate this to rise to 0.9x by end-FY20, factoring in new debt.
  • Given the lack of earnings growth catalyst, share price is likely to remain in a tight range of S$8.70-9.40. See See Singapore Airlines Share Price.


EARNINGS REVISION/RISK

  • Minimal changes to our earnings assumptions. We have however lower our cargo capacity growth assumption and higher staff cost for FY20.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • None in the next six months.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-11-07
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.4 DOWN 9.500



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