• Core 1HFY17 missed our estimates
• Competitive landscape to intensify
• Lower FV on cut in estimates

Weakening yields amid tepid global economic outlook

Singapore Airlines’ (SIA) 1HFY17 revenue declined 3.6% YoY to S$7.31b as downward pressure on yields persisted while operating expenses fell 4.6% YoY to S$7.0b mainly on lower net fuel cost (-21.8%). 1HFY17 passenger yields declined across all SIA portfolio airlines (i.e. parent, Scoot and SilkAir) except for Tigerair, which came in flat. Consequently, with fuel savings not enough to offset the declining yields, and stripping out one-off items, SIA’s 1HFY17 core PATMI missed our expectations, as it plunged 40.6% YoY to S$122.3m, and formed 25% of our FY17 forecast.

We believe competition is likely to continue to intensify as the Chinese carriers continue to expand onto long-haul routes (e.g. China-North America routes), as seen on their expansion on ChinaSouthwest-Pacific routes. With uncertainties cast over global economic outlook post-Brexit vote, we believe demand for air travel will likely remain muted, and continue to exert pressure on the already deteriorating yields.

Positive on Scoot-Tigerair integration over the long-term

SIA also announced that Scoot and Tigerair will be integrated to adopt a single brand and operating licence under Scoot name. The integration is expected to be realized in 2HCY17. From the cost aspect, we believe there will be savings, though to a limited extent, through integration of support functions and touchpoint integration for customers. That said, we believe the real value of this integration is on its revenue growth potential, which will only be realized after the merged brand receives regulatory approval of the single operating licence.

With a single licence, we expect the new Scoot to be more nimble in terms of flight scheduling to optimise flight connections between the two currently separate airlines. Currently, connectivity between Tigerair and Scoot is ~5% compared to ~40% between parent airline and SilkAir. Hence, we are positive on this integration, but expect the revenue growth potential to only materialize from FY18 onwards, at the earliest.

Maintain HOLD; cut FV to S$10.22

On weak 1HFY17 and deteriorating yields, we cut our FY17F/18F EPS by 25%/35%, respectively. Maintain HOLD, as we lower our FV from S$10.80 to S$10.22, based on 0.9x FY17F P/B (- 1SD 7-year mean). Interim dividend for 2QFY17 has come off from 10.0 S-cents in 2QFY16 to 9.0 S-cents.

Source: OCBC Research - 7 Nov 2016