• Core 9MFY18 above expectations
• Strong demand amid stabilizing yields
• Accumulate at S$10.00 and lower

9MFY18 Earnings Growth Driven by All Entities Except SilkAir

Singapore Airlines’ (SIA) 9MFY18 revenue grew 6.0% YoY to S$4.08b grew 5.7% YoY to S$11.79b on stronger passenger and cargo flown revenue driven by: 1) passenger traffic growth (6.7%), as well as 2) higher freight carriage (+5.5%) and yield (+8.9%). 9MFY18 operating expenses increased 3.6% YoY to S$10.95b, driven mainly by higher staff costs (+3.8%), handling charges (+11.5%), higher net fuel costs (+3.6%) on higher average jet fuel prices, and higher depreciation (+5.3%), but partly offset by lower rentals on leased aircraft (-8.4%).

All major entities in SIA group except SilkAir reported improved operating results as SilkAir’s higher costs and expansion in operations outstripped revenue growth on weaker yields. Consequently, stripping out one-off items recorded in 9MFY17 and 1QFY18, 9MFY18 core PATMI beat our expectations as it jumped 42.2% YoY to S$538.1m, and formed 95.8% of our FY18 forecast.

Stabilizing Yields But Also Higher Input Costs

Looking ahead, we expect the strong traffic (passenger and freight) growth to sustain on the back of broad-based global economic growth outlook, resulting in stabilization of yields. However, we expect net fuel costs to be higher in 4QFY18 and into FY19, and believe SIA will be unlikely able to fully pass this increase in input costs to passengers due to the competitive landscape on some of SIA’s key routes.

While Gulf carriers seem to be rationalizing capacity on the kangaroo routes, we remain cautious with the return of Qantas to serve direct flights between Singapore and Europe. Management also noted yields on transpacific routes remain soft as the three main Chinese airlines continue to add capacity.

Higher FV of S$10.85

On above-expectations results, we raise our FY18F core PATMI by 24% but on higher input costs, we pare our FY19F core PATMI slightly by 5%.Consequently, our FV increases from S$10.50 to S$10.85, based on 0.9x FY18F P/B. All considered, even on the back of strong demand outlook, we think it makes sense to wait for more consistency in stabilization of yields, or look for opportunities to accumulate at S$10.00 and lower.

Source: OCBC Research - 15 Feb 2018