Singapore Airlines (SIA) - DBS Research 2020-02-18: COVID-19 A Blip En Route To A Brighter Future

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - COVID-19 A Blip En Route To A Brighter Future

Singapore Airlines (SGX:C6L)'s 3Q net profit of S$315m was above our expectations, led by the strong performance of parent airline SIA.
Cut FY20F/21F estimates by 27%/7% respectively to factor in the impact from the COVID-19 outbreak.
The success of its transformation programme should allow SIA to post better profitability in the longer term.

Parent airline SIA continued to post a strong performance in the third quarter, with firm carriage growth of 9.7% and Revenue per ASK growth of 1.3%, further building on its firm results in the second quarter and demonstrating the fruits of its transformation programme.
With the majority of flights into Mainland China, Hong Kong and Macau (c. 15% of SIA’s capacity) suspended, and weaker demand for flights to North Asia and parts of Southeast Asia, the ongoing COVID-19 outbreak will significantly impact SIA’s 4Q20 and will also spill over into 1Q21 (quarter ending June). Assuming an improvement in the situation by the end of March, we cut our FY20F/21F estimates by 27%/7% respectively to factor in the impact from the COVID-19 outbreak.
Like SARS and H1N1, we believe COVID-19 will eventually blow over and the success of SIA’s transformation programme will allow it to post sustained higher profitability in the longer term.

Singapore Airlines posted strong 3QFY20 results, with revenue rising by 3% y-o-y to a record S$4,471m, while operating profit rose by 16% y-o-y to S$449m and net profit increased 11% y-o-y to S$315m, 5% above our estimate of S$300m.
On a segmental basis, nearly all of the gain in operating profit was led by the parent airline SIA, where EBIT rose by 12% y-o-y to S$413m.
Operating earnings at Silkair (S$7m) and SIA Engineering (S$16m) were flat y-o-y while Scoot posted a S$3m improvement to S$4m. Passenger flown revenue increased by a robust 7% y-o-y or S$239m, driven by firm traffic growth (+8.3%) as load factor improved by 2.6ppts to 85.6% (a record for the third quarter) while RASK (Revenue per ASK) grew by 1.3% to 8 Scts. This was partially offset by weaker cargo revenue (-S$112m) as both yield and load factor fell on weaker cargo demand amid trade uncertainties and an export manufacturing slowdown in Europe and Asia.
Lower net fuel costs (-S$45m or -3.6%) partially offset higher non-fuel expenditure of S$113m (+4.2%), which is in line with passenger capacity growth of 4.9% y-o-y.
For the nine months ending December 2019, group revenue increased by 4.5% y-o-y to S$12.8bn while operating profit rose by 6% y-o-y to S$862m and net profit increased by 8% y-o-y to S$520m.

The ongoing COVID-19 outbreak will significantly impact Singapore Airlines’s 4Q results (quarter ending March) as passenger traffic and load factors take a hit. SIA and Silkair have drastically reduced their frequencies to Mainland China, while Scoot has suspended all flights to China until the end of March.
Singapore Airlines’s substantial fuel hedging position (4Q:79% of fuel requirements hedged at US$76 per barrel; FY21: 51% of jet fuel hedged at US$74 and 22% of Brent hedged at US$58) means that fuel hedging losses will also weigh on earnings in the short term given the recent drop in oil prices. We assume an improvement in the situation by the end of March and cut our FY20F/21F estimates by 27%/7% respectively to factor in the impact from the COVID-19 outbreak.

The firm 3Q results highlight the success of the company’s transformation programme, as evidenced by stronger passenger flown revenue and better margins in the company’s last few quarters of earnings.
While the COVID-19 outbreak will undoubtedly affect Singapore Airlines’s earnings in the first half of calendar year 2020, we believe that the company is in a strong position for a sustained improvement in its financial performance once the COVID-19 outbreak blows over.
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Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2020-02-18

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