Singapore Airlines (SIA) - CGS-CIMB Research 2020-02-05: Full-year Profits To Be Hit By Wuhan Flu

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Full-year Profits To Be Hit By Wuhan Flu

We expect SINGAPORE AIRLINES (SIA, SGX:C6L) to report net losses for the next half year from the Wuhan viral epidemic as demand for flights to China and non-China destinations are hurt.
The fall in jet fuel prices mitigate the impact on the P&L, but large mark-to-market losses could emerge from outstanding fuel hedges, hurting the B/S.

We maintain our HOLD call on SIA, but slash our FY20-21F core EPS forecasts by 34-61% to take into account the negative impact on earnings from the reduced propensity to travel, and the lost revenue opportunities on China routes, arising from the pandemic. See Singapore Airlines Target Price.

The first case of the coronavirus was detected in Wuhan, Hubei Province in Dec 2019, and this has spread rapidly since, particularly within China. In response to transmission fears, China banned group tours to foreign countries from 27 Jan, and Singapore banned anyone who has been to China in the past 14 days from entering the country effective 1 Feb, even on transit flights. Consequently, travel demand to China has collapsed, which hurts not just SIA group’s direct flights to China, but also travel from other parts of the world to China via the Singapore hub.
Anecdotally, we hear that even intra-ASEAN flight demand has been negatively affected. In short, we believe that SIA group will experience a large drop in travel demand, centered on its routes to China (plus HK and Macau), but also extending to many other parts of its route network.

SIA mainline has cut ASK capacity to China by 47% for the month of Feb, and even if we assume the Feb cuts will be extended for three months, it will only amount to 3% of SIA mainline’s quarterly ASK. In contrast, SIA mainline cut its ASK by 30% during the Apr-Jun 2003 quarter due to SARS.
SilkAir has cut its China ASK by 44% for Feb only, but so far, flights to other countries continue as normal, so the systemwide capacity cut is only 10% on a full quarter basis, which also looks low.
Meanwhile, Scoot has cut Feb-Mar capacity to China by 90%, excluding ad-hoc cuts for HK and Macau. This represents some 45% of Scoot’s medium/long-haul ASK; systemwide, the cuts represent 27% of Scoot’s total capacity since the short-haul flights remain intact.
We think that SIA mainline and SilkAir need to be more aggressive in their China cuts in extent and duration, and all three airlines need to consider cutting other flights in their wider non-China network, without which, its load factors may fall below the low of 57% seen during the Apr-Jun 2003 SARS quarter, and the negative earnings impact could be greater.
Our model assumes that the flight cancellations will impact the group for two whole quarters.

China is a much bigger source of tourist arrivals in Singapore than in 2003, and SIA has intensified its exposure to China via Scoot in the past five years. While SIA booked in a single quarter’s net loss of S$312m in the Apr-Jun 2003 quarter during SARS, we pencil in two quarters’ losses in the Jan-Jun 2020F period totalling S$380m.
If SIA Cargo is hurt by the factory and logistics shutdown in China, which we have not factored in, the losses could be larger.
Finally, the drop in oil prices may result in hedging and MTM losses.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-05

SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.46 DOWN 10.000