Singapore Airlines (SIA) - UOB Kay Hian 2020-01-10: Fuel Prices Not A Concern, But Bushfires In Australia Likely To Curb Traffic In 4QFY20

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Fuel Prices Not A Concern, But Bushfires In Australia Likely To Curb Traffic In 4QFY20

We expect SINGAPORE AIRLINES (SIA, SGX:C6L) to report strong 3QFY20 results on the back of strong load factors, but we are cautious towards the final quarter due to the bushfires in Australia. Meanwhile, we are not optimistic of swift compensation or return to service for B737 Max by 1H20.

On the other hand, Middle East tensions and rising fuel prices will have minimal impact on SIA with effective hedge on jet fuel at US$76/bbl.
Maintain HOLD with a lower target price. See Singapore Airlines Target Price. Suggested entry price: S$8.60.

SIA’s 3QFY20 load factor is likely to be strong (2M3QFY20: +2.3ppt) but 4QFY20’s traffic could be crimped by bushfires in Australia which accounts for 16% of SIA’s seat capacity and 18.3% of Scoot’s seat capacity. New South Wales has issued a travel advisory on 21 Dec 19. Travel demand could be substantially lower during the summer school holiday period which is the peak season for tourism.
Load factors to South West Pacific is typically higher than SIA’s overall load factors and yields could also be impacted as Sydney is an originating and departing (O&D) destination for transpacific business traffic. 20%-owned Virgin Australia’s earnings could be similarly impacted.

Turkish Airlines was reported to have received US$9.4m in compensation for each of its 24 aircraft. The quantum of compensation could vary significantly among airlines and depend on the duration of the grounded aircraft, loss of revenue, cost of spares etc.
We estimate that if the B737 Max remains grounded till Mar 20, compensation for Silk Air’s 6 B737 Max would amount to at least US$54m. Alternatively, Boeing could also offer discounts on future purchases.
All in all, we do not recommend buying SIA on expectation of a swift or sizeable compensation from Boeing. We estimate that the B737 Max could only return to service in 3Q20.

Post 2QFY20 (Sept 2019), jet fuel prices have risen by about 6.6%. However, SIA has an effective hedge of 77% on jet fuel at US$76/bbl for 2HFY20. Ytd (FY20), jet fuel has averaged US$77.8/bbl, while post 2QFY20 it has averaged US$76.5/bbl.
For FY20, we have assumed that into-plane jet fuel costs will average US$81/bbl. Thus, the odds of a surprise fuel cost escalation are low.
For FY21, SIA has hedged 29% of its fuel requirements at US$79/bbl although this quantum would very likely have risen by at least 10ppt as at Dec 19.

Actual capex for FY20 could come in lower than the guided S$5.7b as SIA is unlikely to have made pre-delivery payments for 30 outstanding B737 Max aircraft on orders. Consequently, we have lowered our capex assumption for FY20 to S$5.2b.

3QFY20 results could fare well, but we are cautious of the final quarter, due to the bush fires in Australia. We have lowered our FY20 net profit forecast by 1.5% due mainly to a lowered traffic growth assumption for Scoot and SIA and higher losses from Virgin Australia, offset by lower financing costs arising from lower new debt assumptions. We recommend accumulating near S$8.60 and trimming at S$9.10 or higher.

We have lowered our FY20 net profit forecast by 2% factoring in weaker traffic growth in 4QFY20, offset by a US$2/bbl reduction in fuel cost assumptions to US$81/bbl for FY20.

Maintain HOLD but with lower fair value. We value SIA on an SOTP basis, valuing the airline operations at 0.7x FY20F book value. See Singapore Airlines Share Price; Singapore Airlines Target Price.
Recommended entry level is near S$8.60.

K Ajith UOB Kay Hian Research | David Lee Gao Peng UOB Kay Hian | https://research.uobkayhian.com/ 2020-01-10

SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.100 DOWN 9.400