• Dividend cut on lower earnings
• Spending S$30b in capex over next five years
• Airline industry remains challenging

Core FY17 Missed Forecasts

Singapore Airlines’ (SIA) 4QFY17 swung to a net loss of at S$138.3m as it recorded a one-off provision of S$131.9m in relation to competitionrelated fines, on the back of flat YoY revenue for the quarter.

For FY17, revenue fell 2.4% to S$14.9b with weaker performances at passenger airlines and cargo airline due to yield erosion, and other non-recurring income. Consequently, with a 2.1% reduction in operating expenses on cheaper fuel costs, FY17 core PATMI was below expectations as it declined 16.0% to S$372.1m, forming 80.8% of our FY17 estimate.

On the back of disappointing earnings, SIA is recommending a final dividend of S$0.11 (FY16: S$0.35), bringing the total dividend payment for FY17 to S$0.20 (FY16: S$0.45).

The Worst May Not be Over

In our view, as we still expect weak yields to persist:

1) overcapacity on SIA key routes as the Chinese carriers expand aggressively on their long-haul routes, especially the Southwest Pacific routes, and

2) if oil prices remain low, airlines would likely continue to charge cheaply in order to compete.

While SIA noted premium economy provided some yield support in FY17, with this product already implemented on most major long-haul routes, it would be difficult to see similar level of support should yield decline worsens. In addition, SIA’s strategy of a portfolio of multi-airlines to provide connectivity as well as partnerships with local players in key markets are unlikely to bear significant fruits in the near to medium term.

Even the new transformation office set up to conduct organization-wide review to look at new revenue streams and optimize cost base will not have material impact any time soon. Coupled with a capex plan to spend S$30b over the next five years to expand and renew its fleet, alongside the corresponding increase in staff costs, we believe the worst may not be over.

Maintain HOLD But Lowers FV to S$10.03

On missed core FY17, we cut our FY18F PATMI by 9.6% and introduce FY19 estimates. Consequently, our FV decreases from S$10.36 to S$10.03 (0.9x FY18F P/B) but maintain HOLD, after recording a 7.3% fall in share price last Friday.

Source: OCBC Research - 22 May 2017