Simons Trading Research

Author: simonsg   |   Latest post: Wed, 17 Jul 2019, 7:54 AM


Singapore Airlines (SIA) - Weak Load Factors at SIA Cargo and Scoot Likely to Dampen 3QFY19 & Full-Year Results

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  • Singapore Airlines (SIA) highlighted that RASK was “resilient” in Dec 18 and in 3QFY19. However, weak load factors from Scoot and cargo operations in December and 3QFY19 should impact group profitability.
  • We also expect cargo traffic to decline in FY20 due to weak PMI. We believe this has not been factored in by the street.
  • Maintain HOLD but lower our target price from S$10.40 to S$10.20. Suggested entry level is S$9.00.

What’s New

Pax load factor improved in Dec 18 and 3QFY18.

  • Parent airlines’ load factor for December 2018 improved for the 9th consecutive month as traffic outpaced capacity growth. The improvement in pax load factor was broad based except for the America’s due to significant capacity growth.
  • 3QFY19’s load factor improved by 1.8ppt, which holds scope for improved profitability, provided yields do not falter.

RASK said to be “resilient” throughout the quarter.

  • SINGAPORE AIRLINES LTD (SGX:C6L) noted that RASK (revenue relative to seat capacity) remained resilient throughout the quarter. In 2QFY19, RASK improved by 3.1%, while yields fell 1%. For pax yields to remain at least flat y-o-y, RASK would have to rise by 2.2% in 3QFY19.

Cargo traffic declined for the third consecutive month.

  • Dec 18’s 3.5% y-o-y decline in cargo traffic does not come as a surprise. Slowing global trade and restocking ahead of the imposition of tariffs by the US were key factors. However, leading indicators such as weak PMI now seem to suggest that the trend of weaker cargo will accelerate into 2020. Thus, we lower our cargo traffic growth assumptions from -2.6% to -3.0% for FY19, and from -1.0% to -4.0% for FY20.

Scoot’s pax load factor has declined for two consecutive months and the carrier is likely to report a loss.

  • Repeated flight delays and concerns over problems with the Rolls Royce engine on the Dreamliners are likely to affect demand going forward. We thus lower our traffic growth assumptions from 16% to 14% for FY19, and by 3ppt to 12% for FY20.

Stock Impact

Near-term headwinds: Slowing cargo traffic and weakening demand for Scoot.

  • Weakness in global PMI signals slower economic activity in the coming quarters. As such, we lower our cargo traffic growth assumption for FY19 from -2.6% to -3.0% and for FY20, we now assume a 4% decline vs a 1% decline previously.
  • We also lower our traffic growth assumption for Scoot from 15% to 12% for FY20.

Over the medium term, SIA and other airlines could be hit by higher jet fuel costs as IMO2020 kicks in.

  • The International Maritime Organisation mandates that by Jan 20, shipping companies cut marine fuel’s sulphur content to less than 0.5%. Some experts are of the view that this will result in a shortage of supply for other energy distillates, including jet fuel. We have not factored this in for FY20.

Earnings Revision / Risk

  • We lower our net profit estimates by 3% to S$629m for FY19 and by 15% to S$594m for FY20 after factoring in lower cargo traffic and lower pax traffic for Scoot.

Valuation / Recommendation

  • We continue to value Singapore Airlines (SIA) on an SOTP basis, with the airline operations valued at 0.75x book value and SIA ENGINEERING CO LTD (SGX:S59) valued at S$2.70. Refer to the PDF report attached for the breakdown of SOTP. 
  • Our fair value is now lowered to S$10.20. Suggested entry price is $9.00.

Share Price Catalyst

  • None.

Source: UOB Kay Hian Research - 17 Jan 2019

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