• Singapore Airlines's FY19 core earnings in line with expectations, with astronger performance in the second half of FY19.
• Final dividend of 22 Scts brings full-year DPS to 30 Scts.
• Earnings recovery remains on track in our view, as Singapore Airlines’s transformation programme continues to bear fruit.
• Maintain BUY with S$10.80 target price.

Maintain BUY With Target Price of S$10.80

• We believe that SINGAPORE AIRLINES LTD (SGX:C6L)’s transformation programme is beginning to make a material difference in helping the group’s earnings recover, with revenue growth finally returning after years of stagnation and cost management efforts also bearing fruit. This was evident as Singapore Airlines posted a stronger profit performance in the second half of FY19 compared to the first half.
• We project Singapore Airlines’s profitability to improve in FY20 as the transformation programme continues.
• While jet fuel prices have rebounded to US$85/bbl currently, Singapore Airlines has hedged 69% of its FY20 fuel consumption at US$76/bbl, offering significant downside protection should oil and jet fuel prices spike.

Where We Differ

• We have higher-than-consensus forecasts as we are positive on Singapore Airlines’s transformation programme paying off.

Potential Catalysts

• SIA’s share price should re-rate as its earnings continue to show signs of recovery.
• Undemanding valuations. The stock is currently trading at around 0.8x FY20F P/BV, which is -1.5 SD against its 10-year average and with a decent prospective yield of 3.2%.

Valuation

• Maintain BUY with Target Price of S$10.80, against a projected ROE of 7% for FY20F. Our target price is based on 0.95x FY20F P/BV, which is at Singapore Airlines’s 5-year average price-to-book valuation.

Key Risks to Our View

• Vulnerable to demand shocks and/or fuel price increase. With operating margins at razor thin levels, Singapore Airlines is vulnerable to demand shocks and/or fuel price hikes.

What's New - SIA's Stronger Performance in the Second Half of FY19 Shows SIA’s Earnings Recovery Is on Track

FY19 core earnings in line.

• Singapore Airlines reported FY19 net profit of S$683m which, if excluding net non-operating items of S$49m in 4Q19, would have been in line with our full-year forecast of S$745m.
• Revenue rose by 3.3% y-o-y to S$16.3bn, which is a record for the group, driven mainly by higher carriage as passenger yield was largely flat. Operating profit slipped 31% y-o-y to S$1,067m as fuel costs rose by nearly 18% y-o-y to S$4.6bn, accounting for 30.1% of total operating costs (+2.7ppts y-o-y).
• Meanwhile, non-fuel costs rose by just 3% y-o-y. Last year’s revenue also included S$243m in one-off items.
• On a segmental basis, operating profit for the Parent Airline fell by S$347m to S$991m on higher fuel costs and the absence of non-recurring incidental revenue while profit contributions from SIA Engineering (SGX:S59) (S$57m in FY19 vs S$79m in FY18), Silkair (S$15m in FY19 vs S$44m in FY18) and Scoot (-S$15m in FY19 vs S$78m in FY18) were all lower as well.
• A final dividend of 22 Scts has been declared, bringing total FY dividends to 30 Scts, in line with expectations. See SIA's dividend history.

Earnings recovery on track.

• Although full-year core profit of S$859m (S$683m + S$116m share of Virgin Australia’s accounting adjustments + $60m Silkair re-fleeting and restructuring costs) was 22% lower y-o-y, the group’s performance in the second half of FY19 was better than the first half, as the transformation programme started to bear fruit in the form of stronger revenues and tight non-fuel cost management. We remain of the view that we should continue to see steady improvements in the group’s earnings as the transformation programme continues.
• Positive earnings recovery drivers ahead include continued better revenue management (optimising Revenue per ASK), fleet renewal to improve fuel efficiency and augment seat density as well as the planned merger of Silkair into Scoot.
• Furthermore, Singapore Airlines remains well hedged with 69% of its fuel requirement hedged for FY19 at US$75/bbl for jet fuel and up to 46% of its fuel consumption extending to FYE Mar 2025, providing superior downside protection to the rest of its peers should fuel prices spike.

Source: DBS Research - 21 May 2019