Passengers Holding Up, But Cargo in Free Fall

• SINGAPORE AIRLINES LTD (SIA, SGX:C6L)'s 2QFY20 core net profit was below our and consensus est.’s due to weak cargo performance and higher fuel cost. Also, the regional and low-cost passenger business segments have underperformed.
• A DPS of SG8 cents was announced (flat y-o-y). See Singapore Airlines Dividend History.
• We cut out FY20-22 earnings forecasts by 23%, 21% and 19% to factor in the weaker 1H20 performance, lower cargo performance and also management’s latest capacity growth plans.
• We cut our Target Price to SGD10.7 (-5%), based on 1.0x FY21 P/BV. See Singapore Airlines Share Price; Singapore Airlines Target Price.
• SIA remains a BUY. We will update after the analyst briefing later today.

Not Going to Meet Our Full-year Forecast

• SIA’s 1H20 core net profit of SGD242m (-22.1% y-o-y) makes up only 28% of our full-year forecast. It is also well below consensus at only 30%. Load factors in 1H20 were mixed as passenger load factor rose 1ppt y-o-y to 84.6% but cargo declined by 4ppt to 58.4%. See Singapore Airlines Announcements.
• 1H20 yields are more of the same; passenger yield was marginally 0.5% higher y-o-y whilst cargo yields declined by 6.3% y-o-y. The weak performance in cargo is a common feature of Asia Pacific carriers in 2019.

Demand Is There, But Yields Are Not

• SIA is able to fill up its passenger capacity convincingly. However, this is at the expense of low yields and therefore suggests the market is still fragile. SIA is able to navigate the current tough conditions better than its peers due to its fuel hedge and cost efficient operations, but the profits will be lower than last year.

Still Among the Best Risk-reward Asian Carriers

• The aviation sector is undergoing one of its most challenging periods due to overcapacity and relatively subdued market. A structural consolidation is required, but very few airlines have taken action. SIA and Cebu Air (CEB PM) are the two airlines best placed carrier in the current market due to their stellar operations, efficient operations and marketing prowess.

Revisions to Earnings and Valuation

FY20E earnings lowered due to weak 1H20

• SIA’s 1H20 core net profit of SGD242m reached only 28% of our full-year FY20 forecast of SGD872m. The cargo segment has underperformed significantly and it’s expected to endure further distress, according to management. Furthermore, the current market fuel price is higher than what we had forecasted earlier.
• Based on our revised parameters, we now forecast FY20 core net profit of SGD672m (-16.3% y-o-y). This is 22.9% lower than our previous forecast.

Revisions to FY21-22E

• For FY21E, we cut our core net profit forecast by 21% to SGD684m (+1.8% y-o-y). We have made adjustments to our yield and unit operating cost.
• For FY22E, we cut our core net profit forecast by 18.6% to SGD705m (+3.0% y-o-y).
• We have made adjustments to our yield and unit operating cost.

Source: Maybank Kim Eng Research - 6 Nov 2019