• SIA's 2Q19 EBIT falls 35% y-o-y to S$233m on higher fuel costs and lower passenger yield - below expectations.
• Including share of one-off losses of S$116m at associate Virgin Australia, interim profit fell 69% y-o-y to S$196m; interim DPS cut by 20% to 8Scts. 
• We cut FY19F/20F EPS estimates by 31%/23%. 
• Downgrade to HOLD with Target Price of S$10.20. 

Downgrade to HOLD With Target Price of S$10.20

• SIA reported 2Q19 earnings that were below our expectations as passenger yield for the flagship segment declined 1% y-o-y and one-off share of losses at associate Virgin Australia led to 81% decline in net profit for the quarter to S$56.4m, with interim earnings falling by 81% y-o-y to just S$196m.
• Meanwhile, the Group also cut its interim dividend from 10Scts to 8Scts.

Where We Differ

• We lower our FY19F and FY20F estimates by 31% and 23% respectively to reflect lower passenger yield assumptions and the one-off losses at Virgin Australia, and expect consensus to also cut forecasts.

Potential Catalysts

• SIA’s share price could re-rate on the back of yield recovery, sustained improvement in revenues, and ongoing cost management initiatives to lower its costs.
• More significant passenger yield improvement is needed for core earnings to rebound. With fuel prices at a substantially higher level currently, passenger yields need to improve for SIA to post returns equal or better than its cost of capital.
• Meanwhile, SIA’s transformation program has started to bear fruit as non-fuel costs across all segments have fallen and further gains from the program could help to alleviate cost pressures and further optimise revenues.

Valuation

Key Risks to Our View

• Vulnerable to demand shocks and/or fuel price increase. With operating margins at razor thin levels, SIA is vulnerable to any demand shocks and/or an increase in fuel prices.

What's New - Weak 2Q19 Earnings Drag Interim Profits Even Lower

Source: DBS Research - 14 Nov 2018