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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Sep 2019, 9:22 PM

 

Singapore Airlines (SIA SP) - 3QFY19 Earnings Beat, But Does Not Warrant a Re-rating

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  • While SIA's 3QFY19 earnings were better than expected, we still do not see that as a catalyst for upward revision.
  • While pax yields or RASK could be maintained into the next two quarters, there is a strong likelihood that demand could falter as the global economy slows down. We already see signs of that for the cargo business.
  • We maintain our HOLD rating, with an unchanged target price.
  • Suggested entry level, S$9.50.

3qfy19 Results

Admirable quarter, given headwinds and 6.9% pax capacity growth at group level.

  • SINGAPORE AIRLINES LTD (SGX:C6L, SIA)’s 3QFY19 net profit came in 25% and 27% above our and street estimates respectively. The earnings beat was due to stronger-than-expected pax yields, which turned out to be flat y-o-y vs our expectation of a 1% y-o-y decline and lower than expected non-fuel cost.
  • Group revenue grew 6.4%, underpinned by a 7.7% rise in pax flown revenue. Despite that, operating profit was weak, due to a 27% y-o-y rise in into-plane fuel cost.
  • Operating cash flow before working capital changes was nonetheless higher by 2.6%.

Pax yields remain firm on long haul, but faces pressure on short haul regional routes.

  • SIA singled out the US routes as having the strong load factors and favourable yields on the front end, but noted weaker pricing on the back end for the same sector. SIA also noted strong demand and yields on the direct business and premium economy only flights to Los Angeles and New York.
  • In addition, SIA noted that for the parent airline, yields would have risen by 2% y-o-y, were it not for a stronger Singapore dollar.

JV & associate income (-66.6%) dragged down by Vistara and Nok Scoot in 3QFY19.

  • Virgin Australia, in which SIA has a 20% share, saw profits surging 16-fold to A$73.8m.
  • SIA also invested S$184m in Vistara in 3QFY19 to fund the latter’s capex. Total investment in the airline amounted to S$370m.

SIA sees a general slowdown in cargo demand since Dec 18.

  • This is consistent with an observation from WorldACD which highlighted a “double whammy” of negative volume and yields for December. SIA pointed out that cargo yields dipped 4.2% in December. We believe yields will fall further in 1Q19, drawing guidance from industry authority, Drewry which reported that rates dropped 3.5% m-o-m in January.
  • SIA hedged 80% of jet fuel requirements for 4QFY19 at US$74/bbl vs 3QFY19’s 58% at US$71/bbl. For FY20, SIA has hedged 54% of jet fuel at US$76 and another 15% at US$55/bbl

Stock Impact

A key positive is the fact that long haul yields are holding up.

  • However, we are not sure to what extent the yields are a reflection of a period when consumer confidence was more buoyant. Yields typically fall as the economic cycle reverses and general cargo yields are a leading indicator of softer demand.
  • Still, we are open to the possibility that SIA’s firmer yields are due to improved product offerings and could remain firm for the next six months.

Cash flow concerns have not abated.

  • We had previously highlighted that SIA could require additional funding.

Earnings Revision / Risk

  • We raised our FY19 net profit forecast by 3% to reflect marginally better pax yields in 3QFY19.

Valuation / Recommendation

  • We maintain our target price of S$10.20, which is SOTP-based, factoring our fair value for SIA Engineering and 0.75x FY20F's book value for the remaining business.

Share Price Catalyst

  • Better-than-expected cargo traffic.

Source: UOB Kay Hian Research - 18 Feb 2019

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