• Core 9MFY17 beat our estimates
• S$79m write-down over Tigerair brand and trademark
• Yields likely to stay depressed

Exceptional 3QFY17 for SIA Cargo

Singapore Airlines’ (SIA) 3QFY17 revenue declined 2.5% YoY to S$3.84b on lower passenger flown revenue as passenger yields declined across all SIA portfolio airlines. SIA Cargo’s 3QFY17 was exceptional as it achieved S$53m in operating profit – its best third quarter in nine years. We believe SIA Cargo 3QFY17 results were lifted by: 1) bankruptcy of Hanjin Shipping, which led to a surge in demand for airfreight, and 2) early Chinese New Year effect. Hence, on the back of tepid world trade growth outlook, we do not expect the growth recorded by SIA Cargo in 3QFY17 to sustain over the next few quarters.

While SIA recorded a S$79m writedown over its Tigerair brand and trademark, we strip out this one-off and coupled with a 17.6% YoY fall in 3QFY17 fuel expenses, 3QFY17 core PATMI grew 20.3% to S$256.2m. For 9MFY17, revenue fell 3.2% YoY to S$11.2b mainly on weaker passenger yields. However, 9MFY17 core PATMI grew 20.0% YoY to S$378.5m, and formed 85.3% of our FY17 forecast, as fuel costs fell 22.8% mainly driven by lower hedging losses (i.e. rolling-off of expensive hedges).

Weak yield environment becoming a norm

In our view, overcapacity on SIA key routes will persist as the Chinese carriers expand aggressively on their long-haul routes, especially the Southwest Pacific routes. We believe declines ranging from 5.5% to 7.4% in passenger yields across SIA portfolio airlines in 3QFY17 will not be surprising. With uncertain macroeconomic outlook, the only way to drive demand is to offer discounted prices to remain competitive, as SIA focuses on filling up its flights. Hence, we expect muted revenue ahead while cheaper fuel may be the saving grace to mitigate the decline.

We believe this also explains the reason for a change in SIA hedging strategy to hedge Brent up to CY22, covering 33%-39% of SIA’s projected annual fuel consumption, at average prices ranging from US$53-US$59/barrel. We believe this allows SIA lock in cheaper fuel in a seemingly recovering oil price environment.

Maintain HOLD on higher FV of S$10.36

As we raise our forecasts on the better-thanexpected results, our FV increases from S$10.22 to S$10.36. Maintain HOLD.

Source: OCBC Research - 9 Feb 2017