1QFY19 Will be Good

• We estimate 1QFY19 (out 26 Jul) core net profit of SGD251m, +39% y-o-y. 
• The industry is exceptionally disciplined at the moment; adding modest capacity to closely match demand. Yields should rise in our view and operating costs apart from fuel should be stable.
• Our earnings forecast, Target Price of SGD10.95 (pegged to its long-term P/BV mean of 0.93x) and HOLD are unchanged.

Good Operating Statistics

Overall traffic (passenger + cargo) in 1QFY19 grew by 4.5% y-o-y and load factor receded by 0.4ppt y-o-y to 73.8%. All the passenger airlines have performed exceptionally well with record load factors. However the cargo load factor performance has receded to normal levels after a strong cyclical upturn in the past two years. We forecast overall yields grew by 5.5% y-o-y.

Outlook Clouded by Fuel and Changi Airport Charges

The rising fuel price is a major headache for the industry. We noticed this has forced the industry to be more clinical in dispersing new capacity and new route launches are increasingly a rarity. SIA has hedged 47% of its FY19 requirements at USD55/bbl (Brent) and is better positioned relative to other airlines. However, Changi Airport has raised its fees substantially since 1 Jul 2018 and this will have some negative impact on its short-haul network, in our view.

Risks Priced In, HOLD for Dividends

The Company is trading at 0.90 FY19 P/BV, which is fairly close to our fair value of SGD10.95. We don’t foresee any obvious catalyst to re-rate the stock in the near term and hence maintain HOLD.

Operating Statistics 

Traffic growth was healthy 

Passengers carried by the Group grew by 7.5% y-o-y to 8.8m in 1QFY19. This is above its long-term average of 5% growth (excluding the Tigerair acquisition y-o-y comparison), which suggests passenger traffic growth was very healthy. The cargo growth fell 0.3% y-o-y in 1QFY19. 

Load factor 

The Group passenger load factor soared by 2.2ppt y-o-y to 82.3% in 1QFY19. The stronger load factor performance was due to better industry supply-demand dynamics whereby Asia Pacific-based carriers were disciplined in deploying capacity and have been successful in closely matching it with demand growth. 

Cargo load factor fell by 4.3ppt y-o-y to 61.4% in 1QFY19. The air cargo industry has been performing very well in the past 2.5 years, driven by growth in the electronics segment and growth of internet retail sales. 

Yields are showing signs of recovery 

Passenger yields have been recovering since 3QFY18 as the industry managed the supply-demand better and raised ticket prices to offset the rise in crude oil prices. Passenger demand also stayed resilient, with the Asia Pacific region recording growth of 5.6% in 1H18 according to the International Air Travel Association (IATA). We forecast passenger yields grew by 2% y-o-y in 1QFY19. 

Cargo yields have been on an uptrend since 2Q17, driven mainly by the electronics sector and internet retail sales. In addition, the industry shed excess capacity in 2014-16 as the market consolidated. We forecast that cargo yields grew by 8% y-o-y in 1QFY19. 

From an overall basis (passengers + cargo), load factor receded by 0.4ppt y-o-y to 73.8%. We forecast overall yields grew by 5.5% y-o-y underpinned by strong performance of the cargo business. 

Source: Maybank Kim Eng Research - 20 Jul 2018