Singapore Airlines (SIA) - CGS-CIMB Research 2020-02-18: Taking Action To Stem The Cash Burn

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - Taking Action To Stem The Cash Burn

Demand on SIA’s North Asia flights and some connecting flights has been hurt by the Covid-19 epidemic, especially for discretionary leisure travel.
SIA is focusing on cash preservation by reducing capacity in Feb and Mar (more to come for Apr-May) and cutting certain non-critical capex.

Maintain HOLD with unchanged target price of S$8.46, still based on 0.86x CY20F P/BV (1 s.d. below mean since 2011).

Singapore Airlines (SIA, SGX:C6L) hosted its regular quarterly briefing yesterday via conference call. It described the Covid-19 as having the greatest impact on demand for its China, HK and Macau flights, followed by flights to Japan, South Korea and Taiwan; demand for some connecting flights that land at the Singapore hub before proceeding to North Asia have been affected as well.
Within ASEAN, demand to Thailand and Vietnam has been the most seriously affected. Yields have been hurt (SIA mainline’s yields fell 6.7% y-o-y during the SARS epidemic in 2QCY03). Flights to China account for 11% of group ASK capacity (6% of SIA mainline’s ASK capacity, 18% of SilkAir, 26% of Scoot) while flights to North Asia ex-China make up 16% of group ASK (18% of SIA mainline, 3% of SilkAir, and 14% of Scoot). SIA said that corporate and business class travel and long-haul travel have been less affected than discretionary leisure travel and short-haul travel. Hence, the LCC Scoot has taken a greater beating than the FSCs. Outbound cargo traffic from China and HK has also been hit hard, hurting SIA Cargo.

SIA has cut flights for Feb and Mar. SIA mainline cut its China seat capacity in Feb and Mar by 54% and to HK by 17%, SilkAir has done the same for its China flights by 59%, while Scoot has cut almost all of its China flights in Feb and Mar, with flights to HK and Macao subject to ad-hoc cancellations. Flights to other parts of North Asia (Japan, South Korea and Taiwan) have not been cut, although SIA is keeping an eye on them with the potential to reduce flights. SIA may extend the capacity cuts to Apr and Mar.
SIA is also looking to preserve cash by deferring non-essential capex, projects, and payments to suppliers. Operationally, SIA has stepped up cleaning and disinfection of aircraft, suspended crew layovers in China, and no longer offers hot towels to passengers.
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SIA is conscious of the fact that it cannot cut more than 20% of its flights during any season or risk losing the runway slots in the next season. As the Northern Winter runs for five months during 27 Oct 2019 to 28 Mar 2020, the cuts that the group instituted for Feb and Mar have already exceeded that 20% threshold. SIA needs to pay attention to these limits for the Northern Summer from 29 Mar to 24 Oct 2020.
Separately, the SIA group intends to keep its excess aircraft active via rotation and does not intend to offer no-pay leave to staff as it wants to ensure full readiness to resume flights when the WHO declares the Covid-19 outbreak contained.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-02-18

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