• FY15 missed expectation
• Mixed outlook
• Maintain HOLD

FY15 missed as hedging losses limit fuel savings

Singapore Airlines’ (SIA) 4QFY15 revenue climb 6.9% YoY to S$3.88b on better airline operations but offset by decline in contribution from SIAEC and cargo operations. Partially offset by taxes and impairment losses on aircraft, lower fuel costs and improved passenger yield helped turn in an operating profit in 4QFY15 of S$91.9m vs. operating loss of S$60.3m a year ago. Consequently, 4QFY15 PATMI grew 46.7% to S$39.6m. For FY15, revenue grew 2.1% to S$15.57b but excluding Tigerair’s consolidation, SIA’s revenue declined 0.2% to S$15.2b instead. SIA’s parent airline operations showed encouraging statistics as FY15 passenger yield improved 0.9% while passenger unit dropped 2.2%, mainly on lower fuel cost. However, hedging losses of S$549m in FY15 compared to hedging gain of S$87m in FY14 limit fuel savings. Excluding exceptional items, FY15 core PATMI declined 16.1% to S$333.4m and formed ~95% of our forecasts.

Cheaper fuel cost amidst mixed outlook

Our view remains unchanged – we think the airline industry is still plague by overcapacity issues, which may not allow SIA’s passenger yields to sustain at the current level. We also expect contribution from cargo operations to continue its decline on capacity reduction. SIAEC’s gloomy outlook is likely to stick, at least for the next two years. Note that foreign exchange movements including depreciation for AUD, JPY and Euro will further place pressure on outbound air travel demand from those countries. However on a positive note, we do expect fuel savings to improve in FY16. Also, there could be improvement to yields when SIA introduce its premium economy from Aug-15 onwards but bear in mind costs will also increase as such. We expect Tigerair’s performance to improve slowly while NokScoot continues to face headwinds on safety concerns over Thai aviation sector. Overall, outlook remains mixed but cheaper fuel is on SIA’s side.

Maintain HOLD

Factoring in FY15 results, hedging positions and FY17 forecast, our FY16 PATMI forecast drops by 13.5%. However, our FV remains unchanged at S$11.59, which is based on 1.05x FY16 P/B (5-year mean). Maintain HOLD.

Source: OCBC Research - 18 May 2015