Highlights

Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM

 

Singapore Airlines - Share Price Constrained by Mixed Outlook

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  • SIA's 1QFY3/20 core net profit made up 13% of our/consensus previous forecasts, underperforming expectations due to SIA’s share of Virgin Australia’s losses.
  • Maintain HOLD as we see cyclical headwinds from slowing global trade growth, potentially affecting both premium-cabin travel and cargo volumes.
  • Our target price is still based on 0.9x CY19 P/BV (1 s.d. below mean), but lowered to S$10.04 on the back of reductions in our earnings forecasts .

Highlights of 1QFY3/20

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)'s 1QFY20 core net profit of S$108m was 20% lower y-o-y, due mainly to the swing in associate and JV contributions from share of profits in 1QFY19 to a share of losses in 1QFY20, which in turn, was caused by an unfavourable swing to losses at Virgin Australia, partially offset by an improvement in Vistara’s performance. Taking that aside, last quarter’s EBIT was flattish y-o-y, with an operating profit improvement at
    1. SIA mainline’s passenger business and at
    2. SIA Engineering (SGX:S59), largely offset by
    3. lower cargo profits, and
    4. losses at SilkAir and Scoot (vs. breakeven for the latter two airlines in the prior year).

Main pax airline doing well, less so for SilkAir and Scoot

  • SIA mainline (pax and cargo combined) delivered EBIT of S$232m in 1QFY20, up 28% y-o-y from S$181m in the previous year. The full-service carrier (FSC) pax business of SIA mainline probably contributed more than 100% of the increase, as it saw a rare mix of higher yields, volumes, and loads that led to a healthy 2.5% y-o-y rise in unit revenue (RASK, or revenue per unit of ASK capacity) that more than offset a 1.2% y-o-y rise in unit costs.
  • Conversely, the cargo business likely saw profits drop from lower yields, volumes, and loads, coupled with higher unit costs.
  • SilkAir grounded its fleet of six 737 MAX 8 planes on 12 Mar 2019, and 1QFY20 reflected the first full quarter of that impact with an EBIT loss of S$16m, vs. breakeven last year. Costs related to the grounding and loss of revenue from the subsequent reduction of capacity contributed the majority of the loss. This was partly compensated by SilkAir’s third-consecutive quarter of y-o-y RASK increase as passenger demand and loads responded positively to lower yields. The efforts to improve RASK are important because SilkAir had over-expanded by growing ASK capacity 36% over the past four years, which led to a 15% RASK decline over that same period.
  • Scoot may have also over-expanded by growing ASK capacity 73%, leading to a 7% RASK contraction in the past four years. Scoot has now cut poorly-performing flights in order to take over 16 regional routes from SilkAir, with better chances for profitability.

Is there a case to accumulate SIA shares?

  • During our recent marketing trip to Singapore, many investors asked if there was a case to accumulate SIA shares. At its recent low of S$9.06 on 4 Jun, SIA was certainly very attractive, trading at its trough valuation of 0.8x P/BV, but at the current share price of S$9.67, the upside is no longer so compelling, in our view. See SIA share price history.
  • Cathay Pacific recently warned of “intense market competition” that “continued to exert pressure on yield” especially on long-haul flights. SIA also noted that trade disputes and softer airfreight demand has clouded the outlook for passenger demand over the longer term.

HOLD

  • Our HOLD call is premised on weakening global GDP growth and higher tariffs that are now beleaguering the US-China trade and have been negatively affecting SIA’s airfreight demand and yield since late-CY18. There is a historical lagged correlation between cargo demand and demand for premium-cabin and business-related travel, which pose a downside risk.
  • Upside risks include the potential for SilkAir to rethink its long-term capacity growth by renegotiating the 737 MAX 8 orders with Boeing.

Source: CGS-CIMB Research - 1 Aug 2019

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