Singapore Airlines (SIA) - CGS-CIMB Research 2020-05-08: 4QFY20F To Be In The Red Due To Fuel Hedges


Singapore Airlines (SIA) - 4QFY20F To Be In The Red Due To Fuel Hedges

  • Singapore Airlines in its trading update today said its 4QFY3/20F P&L will be adversely affected by MTM losses on a part of its outstanding FY21F fuel hedges.
  • We have already reflected these MTM losses in our balance sheet forecasts and hence this has no impact on our S$4.45 target price (P/BV of 0.84x).
  • Maintain HOLD, because we see no catalysts to SIA's share price given the uncertainty over how quickly Covid-19 can be brought under control.

Fuel hedging MTM losses to be partially reclassified to P&L…

  • Singapore Airlines (SIA, SGX:C6L) issued a trading update today and also hosted a short analyst conference call. Key highlights are as follows.
    • First, SIA mainline and SilkAir have extended their combined capacity cuts of 96% from late-Mar to end-Jun 2020. Scoot is expecting capacity cuts of 98% in that time period.
    • Second, SIA has seen strong cargo demand, and hence has maximised the utilisation of its freighters and even used passenger aircraft for cargo-only flights. Cargo yields have improved in 4QFY20F and also in 1QFY21F.
    • Third, a certain portion of the contracted fuel hedges for FY21F (which we estimate at 30m bbl), are in excess of SIA group’s actual fuel requirements (our estimate: 25m bbl), hence the excess has been classified as ‘ineffective hedges’ where the mark-to-market (MTM) losses will be recognised in the 4QFY20F P&L.
  • Usually, SIA’s accounting policy is for the MTM gains/losses to be booked into its balance sheet reserves, and this policy is still being applied to the portion of fuel hedges in FY21F which are in line with SIA group’s actual requirements and also to the outstanding fuel hedges maturing in FY22-25F. It expects no additional hedging activity, and no restructuring of existing hedges either.

…hence a “material operating loss” is expected for 4QFY20F

  • Fourth, because of the expected MTM losses, SIA group will post a “material operating loss” for 4QFY20F. For FY20F as a whole, SIA group expects to report a “small operating profit” for FY20F after taking into account the healthy 9MFY20 operating profits, but a net loss at the bottomline.
  • Fifth, SIA group is continuing with its plans to cut costs, as well as renegotiate with aircraft manufacturers to adjust the delivery dates for existing aircraft orders. In the last SIA guidance released in Nov 2019, SIA said it had planned for S$6bn in capex for FY21F. But with certain project capex delayed (like IT capex) and with the renegotiation of aircraft deliveries and retrofit scheduled, the capex is likely to be lower, and SIA will release new guidance at its FY21F results on 14 May, with the analyst briefing on 15 May.
  • Sixth, SIA has written down its 20% stake in Virgin Australia to zero, has no outstanding loans to the airline, and is not obligated to provide any funding to it.

Our target price already reflects the MTM losses, but not our P&L

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.45 SAME 4.45