Double Whammy in the Price; Upgrade to HOLD

• We estimate a 2QFY19 (out 13 Nov) core net profit of SGD118m (-38% y-o-y, -16% q-o-q). We think yield attrition and higher jet fuel prices will weigh on its bottom line. Otherwise, the company has done a good job of raising overall loads by 1.7ppts y-o-y to 73.3%, a record since 2010.
• We raise FY19-21E earnings by 3.9-5.5% to factor in higher load factors, its latest traffic-growth plans and new USD/SGD estimates.
• Our Target Price climbs to SGD9.80, still at FY20E P/BV of 0.82x, 1SD below its 10-year mean.
• SIA’s share price has declined by 13% in the last quarter. As we believe this has priced in its near-term challenges, upgrade to HOLD.

Best Operating Statistics Dating Back to 2010

• Overall traffic (passenger + cargo) in 2QFY19 grew 2.9% y-o-y. Load factor went up by 1.7% y-o-y to 73.3%. This was the group’s highest load factor since 2010.
• Changi Airport has slapped a SGD13.30 or 39% increase in passenger tariffs beginning Jul 2018.
• We also notice that published ticket fares are on the low side and factor in an 8% yield decline for 2QFY19 (8% decline in 1QFY19).

Outlook Challenging on Fuel Price Volatility

• The fuel market is exceptionally volatile due to the US-China trade war and US embargo on Iran. As SIA has hedged 47% of its FY19 requirements at USD65/bbl (Brent), it should be better positioned than the other airlines.

Let the Dust Settle Before Stepping in

• SIA’s 2QFY19 will be saddled with big losses from its 20% associate, Virgin Australia (VAH AU, Not Rated), which reported a net loss of AUD603.5m in its 2H18 results. SIA’s share of losses could be SGD50-60m in 2QFY19 but we deem this non-core as the bulk is accounting in nature.
• We also believe we have adequately factored in its near-term risks.

Operating Statistics

Traffic growth healthy

• Passengers carried by the group grew 8.4% y-o-y to 9.1m in 2QFY19. This was above its long-term average of 5% growth (excluding its Tigerair acquisition), which suggests healthy passenger traffic growth.
• Cargo growth was equally healthy at 2.9% y-o-y in 2QFY19.

Load factor

• Group passenger load factor soared by 3.1ppts y-o-y to 84.9% in 2QFY19. We think yields were dropped in order to promote loads.
• Cargo load factor was slightly down by 0.5ppt y-o-y to 63.5%. The air cargo industry has been performing very well in the past 2.5 years, driven by growth in the electronics segment and Internet retail sales.

New Fair Value of SGD9.80

• SIA has been trading range-bound, close to 1SD below its P/BV mean, in the past two years. We believe 1SD below mean is an apt valuation, given that its short-term outlook is clouded by volatile fuel prices, higher Changi Airport charges and huge one-off losses from Virgin Australia.
• Using a one-year forward P/BV of 0.82x, we derive a Target Price of SGD9.80 after our earnings revisions.
• SIA’s share price has declined by 13% in the last three months. As we believe this has priced in its near-term challenges, upgrade to HOLD from SELL.

Source: Maybank Kim Eng Research - 09 Nov 2018