Thursday 14 November 2013

Singapore Airlines

OCBC on 13 Nov 2013

Singapore Airlines’ (SIA) 2QFY14 results exceeded our expectations following a lower fuel bill and much better-than-forecasted associate performance and one-off gains. (Management also declared an interim dividend of 10 S cents vs. 6 S cents for 1H13). However, despite the improved performance, passenger yields remained depressed as sustained competitive pressures necessitated a prolonged extension of promotional fares. Although management has indicated advance bookings for 3QFY14 to be higher YoY, we feel that the increase is seasonal rather than structural and yields are still likely to stay depressed as a result. Maintain SELL on SIA with an unchanged fair value estimate of S$9.50.

2QFY14 boosted by lower fuel & better associate performance
Although Singapore Airlines’ (SIA) 2QFY14 revenue was in line with our expectations (+2.8% YoY to S$3.9b), a lower fuel bill resulted in an improvement in its operating profit (+23.4% to S$86.9m). We had originally factored in a 3% YoY increase in fuel costs but 2Q14 saw a 0.5% dip instead. In terms of its bottom-line, PATMI came in higher by 78.2% to S$160.6m following a much better-than-forecasted associate performance (+82.7% to S$63.2m) and one-off gains of S$12.5m (versus S$4.2m loss in 2Q13). Management declared an interim dividend of 10 S cents (vs. 6 S cents for 1H13).

Yields continue to fall for parent airline
Despite the growth in passenger carriage outpacing capacity expansion (+4.9% vs. +3.2%), passenger yields for the parent airline still fell QoQ for the third straight quarter (-3.5% YoY & -0.9% QoQ to 11.0 S¢/pkm) as sustained competitive pressures necessitated a prolonged extension of promotional fares. As for SilkAir, yields also fell (-5.2% YoY and QoQ to14.0 S¢/pkm) following the failure of passenger demand to absorb capacity injections from new routes. Lastly, the removal of four freighters did not improve cargo yields fell (-1.8% YoY and QoQ to32.1 S¢/tkm) as demand remained soft.

No inflection point yet
Management has indicated advance bookings for 3QFY14 to be higher YoY. However, we feel that the increase is seasonal in nature (due to year-end holidays and on-going fare promotions) rather than structural. In addition, there is a risk that planned capacity expansions related to network adjustments may outpace passenger demand, especially with increased competition. That said, we expect the operating environment to remain challenging in the coming months, and yields are likely to stay depressed. Maintain SELL on SIA with an unchanged fair value estimate of S$9.50. 

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