Singapore Airlines (SIA) - CGS-CIMB Research 2020-02-17: Great 3Q Performance, But 4Q Risks Abound


Singapore Airlines (SIA) - Great 3Q Performance, But 4Q Risks Abound

  • Singapore Airlines (SGX:C6L)'s 9M core net profit of S$488m was 85% of consensus but S$280m more than our full-year forecast of S$208m as we had factored in a large 4Q loss.
  • Without the Covid-19 impact, Singapore Airlines could outperform our/consensus expectations but the big question now is how large the 4Q loss will be.
  • Reiterate HOLD and our target price of S$8.46, still based on 0.86x CY20F P/BV (1 s.d. below mean since 2011).

Huge positive turnaround during 3QFY3/20…

  • The Singapore Airlines group performed very well, with 3Q core net profit up 33% y-o-y, a strong reversal from the 1H’s 35% y-o-y fall in core net profit.
  • As a recap, the poor 1H performance was on account of the weaker cargo performance (due to the US-China trade war), higher losses at Scoot due to heightened competition with Chinese carriers which impacted RASK and engine problems faced by its 787-9 fleet, higher losses at SilkAir due to the grounding of its 737 MAX 8 fleet, higher non-fuel unit costs (greater staff costs due to more headcount, higher pay rates and higher bonus provisions, larger commission payments), and higher share of associate losses (Virgin Australia and Vistara), all of which more than offset stronger operating performance at SIA mainline (higher loads and RASK due to successful revenue management) and better SIA Engineering (SGX:S59) profits.

… due to lower oil prices and lower non-fuel costs at SIA mainline

  • In the 3Q, the challenging dynamics of the 1H seemed to be a distant memory.
  • While the cargo performance was still weaker y-o-y, SilkAir’s EBIT matched that of the previous year, Scoot delivered a small absolute improvement and the share of associate profits was actually higher y-o-y. However, the biggest star of the show was SIA mainline itself, delivering a staggering S$445m in EBIT (+21% y-o-y), its highest EBIT since Oct-Dec 2007, on the back of almost three consecutive years of RASK growth and a surprising 1.9% y-o-y fall in non-fuel unit cost (against 1H’s 0.9% y-o-y increase).
  • SIA attributed the latter to “initiatives arising from the transformation programme” and we will seek clarity at this morning’s analyst briefing to see if this non-fuel CASK drop is sustainable or not. With fuel costs making up 33% of SIA group’s airline operating costs, the 6% y-o-y drop in average post-hedge jet fuel price in the 3Q also made a big impact on the group’s performance; in contrast, the 1H post-hedge jet fuel price averaged 1% higher y-o-y.
  • See Singapore Airlines Share PriceSingapore Airlines Target PriceSingapore Airlines Analyst ReportsSingapore Airlines Dividend HistorySingapore Airlines AnnouncementsSingapore Airlines Latest News

Outlook for 4QFY20F very uncertain; we forecast a loss

  • Our FY20F core net profit forecast for SIA group suggests a S$280m loss for 4QFY20F. By comparison, SIA reported a S$305m core net loss for Apr-Jun 2003 when the SARS epidemic was at its peak.
  • SIA noted that demand for services to China has been “severely affected”, leading to significant capacity cuts in Feb and Mar (we estimate that for 1QCY20F, SIA mainline cut capacity to China and HK by 31%, SilkAir cut flights to China by 39% and Scoot cut 53% of its China flights).
  • Our forecasts for FY21F also reflect one quarter’s loss for 1QFY21F as a result of Covid-19. Furthermore, the drop in oil prices may result in hedging and mark-to-market losses.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-17
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.460 SAME 8.460