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Author: simonsg   |   Latest post: Tue, 18 Jun 2019, 4:55 PM

 

Singapore Airlines (SIA) - Pax Traffic Remains Robust in Feb 19 But ...

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  • Underlying demand for pax traffic remained buoyant in Feb 19, with SIA’s and SilkAir’s pax traffic rising 9.1% y-o-y and 4.6% y-o-y respectively. Cargo traffic however registered the biggest decline in FY19, with load factors falling to GFC levels.
  • Even so, the grounding of B737 Max remains the biggest concern, not just on foregone revenue but also of future demand.
  • We cut our FY20 net profit forecast by S$38m, factoring in an 8% y-o-y decline in traffic for SilkAir.
  • Maintain HOLD. Target price: $10.10. Entry price: $9.00.

What’s New

9.1% y-o-y rise in pax traffic in Feb 19 for parent airline.

  • Taking into account combined traffic for Jan-Feb 19 to remove any anomalies arising from an earlier Chinese New Year, pax traffic rose 10% y-o-y. indicating strong underlying demand. SINGAPORE AIRLINES LTD (SGX:C6L) indicated that it attempted to maintain RASK (pax revenue-to-capacity) despite the strong competition.
  • Scoot’s traffic growth has moderated for four consecutive months, leading to a - 1.5ppt decline in load factor. We note that ytd 4QFY19’s pax load factor of 84.8ppt was lower than 3QFY19’s breakeven levels, suggesting likely losses for the low-cost carrier.

Pax load factor improved marginally by 0.4ppt in Feb and by 1.5ppt in 2M19.

  • West Asia and Africa registered the highest y-o-y increase (+ 4.1ppt) followed by Europe (+1.7ppt) and South West Pacific (+0.5ppt). However, pax load factors declined for both East Asia (-0.4ppt) and Americas (-2.4ppt).

Staggering 15.1% y-o-y decline in cargo traffic for Feb 19 reflects weakening intra-Asia trade volume.

  • February’s decline was also the highest for FY19 and marked six straight months of decline. All routes reported lower load factors, with East Asia registering the largest decrease of 8.7%.
  • Load factors were similarly weak, declining 6.8ppt and registering the lowest level since Jan 09.

Stock Impact

Concerns over B737 Max deliveries and grounding will overshadow strong pax data.

  • SilkAir’s six B737 Max aircraft have been grounded and the carrier has outstanding orders for 31 such aircraft. The grounded aircraft make up about 20% of SilkAir’s current seat capacity.
  • While the parent airline is likely to add flights to offset the lost capacity from the grounded aircraft, we still estimate a S$110m-130m in revenue shortfall as well as about S$30m in fixed costs until this year-end.
  • However, Boeing is reportedly offering a software solution by April and if all goes well, the B737 Max aircraft might be cleared to operate by July. We also believe that Singapore Airlines is likely to receive compensation for the grounded aircraft.

Earnings Revision / Risk

  • We raise FY19 net profit estimate by 1% to factor in better-than-expected pax traffic, offset by weaker cargo traffic.
  • However, we lower our FY20 net profit assumption by 6%, or S$38m, factoring in a conservative 8% decline in traffic for SilkAir.

Valuation / Recommendation

  • We do not envisage any positive catalyst for at least one more quarter There is also the risk that load factors on the B737 Max would be low for some time, even if the aircraft is cleared to fly.
  • We continue to value Singapore Airlines on an SOTP basis. Our fair value is lowered from S$10.20 to S$10.10 due to FY20’s earnings revision.
  • Suggested entry price remains at $9.00.

Share Price Catalyst

  • None.

Source: UOB Kay Hian Research - 19 Mar 2019

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