• Strong load factor and RASK performance
• SIA parent outperformed
• Lower FV estimate of S$9.90

Good 3QFY20 Results

Singapore Airlines (SIA)’s 3QFY20 results beat Bloomberg’s consensus and our forecasts. 3QFY20 revenue grew 30% YoY to S$4.5b, largely driven by strong passenger revenue (+7.0% YoY), partially offset by weak cargo revenue (-17.7% YoY). Expenditure rose 1.7% YoY to $4.0b, on the back of higher non-fuel expenditure (+4.2% YoY) due to growth in capacity and higher traffic, partially offset by lower net fuel costs (-3.6% YoY). As such, 3QFY20 net profit grew 10.9% YoY to S$315m, as associates and joint ventures’ showed improvement in results and operating performance registered stronger growth. Management shared that they will monitoring the situation closely and manage costs tightly.

Strong Passenger Growth Drove Improvements in RASK

SIA’s transformation efforts have started to bear fruits. Passenger growth was strong in 3QFY20, with higher pax load factor (PLF) and RASK (SIA: +1.1%; SilkAir: +3.5%; Scoot: +4.1% YoY) across all airlines. Despite weak cargo revenue, SIA parent airline outperformed this quarter with double digit growth in operating profit, improvement in RASK and record highs in passenger load factor (85.6%), total revenue (S$4.5b), quarterly available seat-km and revenue passenger-km.

In terms of operating profit, SilkAir continued to be adversely affected by the transfer of routes to Scoot as well as the 737 Max grounding, yet it managed to record a profit of S$7m (-6.8% YoY, turned from a loss of S$3m in 2QFY20 to profit in 3QFY20) due to lower expenditure. In addition, Scoot registered an operating profit of S$4m (+S$3m YoY, profit turned from a loss of S$36m in 2QFY29 to profit in 3QFY20), boosted by stronger passenger traffic (+6.8%).

Reduction in Flights Amid COVID-19

In light of COVID-19, the SIA parent airline and SilkAir have reduced frequencies to Mainland China, Hong Kong and Macau routes while Scoot has suspended all routes to Mainland China until 28 Mar 2020. We understand that flights to Mainland China, Hong Kong and Macau represent ~14% of SIA’s passenger capacity; given that these destinations represent a higher percentage of Scoot’s capacity than the average across the group, we believe it would be hit harder in the near-term than the SIA parent and SilkAir.

Management shared that they will be monitoring the situation closely and manage costs tightly e.g to revisit prepayment schedule for future aircrafts deliveries and to reduce some project expenditures. There is currently no plan to cut staff costs or ask staff to take unpaid leave to mitigate cost pressures amid weak demand. In 1QFY03 which was the worst period of SARS’, SIA’s revenue dropped 35% and suffered a net loss of S$312m.

Remarkably, SIA’s performance recovered fairly quickly once SARS was under control in the next quarter. In 2QFY03, SIA returned to profit. With the outbreak of COVID-19, we expect weaker travel demand which will in turn weigh on SIA’s operating performance in 4QFY20/FY21. However, we believe that these setbacks are temporary and expect compensation/supportive policies from the government. After adjustments, our fair value estimate decreases from S$10.46 to S$9.90. SIA is now trading at about 0.8x P/B, close to trough valuations.

Source: OCBC Research - 18 Feb 2020