Singapore Airlines (SIA) - UOB Kay Hian 2020-02-18: 3QFY20 In Cash Preservation Mode

SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Airlines (SIA) - 3QFY20 In Cash Preservation Mode

Despite a relatively good quarter, Singapore Airlines (SGX:C6L) faces substantial headwinds from demand destruction due to COVID-19. While Singapore Airlines is unsure as to when demand will improve, our working assumption is that pax traffic will recover from April for all three carriers.
In the meantime, Singapore Airlines aims to defer pre-delivery payments and is seeking better longer payment terms from suppliers.

Maintain HOLD but this is on the basis that demand picks up by April. Target price: S$9.10.
Entry price: S$8.40.

Singapore Airlines’ earnings growth was driven by:
1. 16% y-o-y rise in parent airline operating profit driven by higher revenue per available seat km (RASK),
2. lower fuel cost,
3. a three-fold rise in operating profit from Scoot, and
4. offset partially by a S$29m credit loss from Nok Scoot.
Singapore Airlines’s book value stood at S$10.25 per share, down 8.6% from Mar 19, due mainly to the adoption of lease accounting as well as a reduction in fair value reserves on hedges. Singapore Airlines generated operating cash flow of S$868m (+72% y-o-y) in 3QFY20, but was still S$1.53m in negative FCF as at 9MFY20. Interest cover stood at 5.0x as at 9MFY20 (-3.4ppt)

Scoot’s exposure to the greater China region is about 50% but the carrier has stopped flights to the region. We estimate that capacity to the Greater China region would have been cut by about 8% in Feb-Mar 20.

The carrier is in talks with its suppliers for easier payment terms and is also reducing flight expenses. Still, the bulk of the burden would be at the capex level and Singapore Airlines is trying to defer pre-delivery payment schedules. The carrier however noted that there is little scope to defer confirmed deliveries over the next 12 months and reaffirmed its capex guidance for the year.
Singapore Airlines has yet to ground aircraft and faces the dilemma of reducing operating costs and maintaining an operationally ready fleet if demand picks up. The carrier also indicated that there are currently no plans to offer no-pay leave or similar cash conservation measures.

For FY21, Singapore Airlines has hedged 51% of jet fuel at US$74/bbl and another 22% at US$58/bbl. Every US$1/bbl decline in fuel cost could lead to S$65m in savings and for FY21, we estimate that fuel price could decline by at least US$3/bbl.

We have however assumed that Singapore Airlines cut final dividend by 50% to 10 S cents and thus save S$119m. The carrier indicated that it would be seeking more favourable payment terms from suppliers and this could impact SATS (SGX:S58)’s cash flow as well.
We estimate that if sentiment does not improve by mid-March, Singapore Airlines would have to raise additional capital to fund capex and potentially even working capital. As at 9MFY20, Singapore Airlines took on S$1.5b in debt. We estimate Singapore Airlines would need to take on an additional S$1b in debt for 4QFY20.

Singapore Airlines indicated that it prefers to raise funds via debt markets rather than equity capital markets, implying lower odds of a rights issue.
The general perception is that Singapore Airlines plays a critical role in Singapore’s economy and the Singapore government’s shareholding in Singapore Airlines would deem the company as too important to fail. Still, we do not envision significant upside for Singapore Airlines and would recommend investors sell into strength at S$9.10 or better.

We have tweaked our FY20 net profit forecast by 3.7%, mainly factoring in lower fuel cost. Our FY21 net profit assumption is also raised by 5%, after factoring in a reduction in fuel cost.

Maintain HOLD. We continue to value Singapore Airlines on an SOTP basis, but have rolled forward our valuation to FY21. The airline operations are valued at 0.7x book value, while SIA Engineering (SGX:S59) is valued at a 10% discount to our fair value of S$3.13 per share. Suggested entry level: S$8.40.
See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-18

SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.100 SAME 9.100