Tuesday 4 August 2015

Singapore Airlines

OCBC on 31 Jul 2015

Singapore Airlines (SIA) reported a set of disappointing 1QFY16 results, which could have been worse if not fuel savings and one-off income. Excluding Tigerair, 1QFY16 revenue declined 3.2% YoY to S$3.6b, which includes a one-off income earned of S$110.1m. 1QFY16 operating expenses dropped 5.2% YoY to S$3.5b mainly driven by fuel savings but once again partially offset by hedging loss of S$262.7m. Consequently, 1QFY16 PATMI improved 162.1% to S$91.2m. Stripping out the one-off income earned from the release of seven delivery slots, SIA 1QFY16 bottom-line could possibly be worse off than 1QFY15. Looking ahead, apart from higher fuel savings, outlook remains challenging as SIA’s long-haul passenger yields see declines as competition from Gulf Carriers’ capacity expansion starts to show. Factoring in results, hedging positions as well as challenging outlook, we cut FY16/17F PATMI by 16.6%/18.7%. Consequently, our FV drops to S$11.27 (prev: S$11.59), which is based on 1.0x FY16F P/B (-0.25 SD 7-year mean). Maintain HOLD.

Weak performance from 1QFY16
Singapore Airlines (SIA) reported a set of disappointing 1QFY16 results, which could have been worse if not fuel savings and one-off income. Excluding Tigerair, 1QFY16 revenue declined 3.2% YoY to S$3.6b, which includes a one-off income earned of S$110.1m. According to management, a material amount of the one-off income came from the release of seven aircraft delivery slots originally planned for delivery over the next few years. Passenger yields on its Americas and Europe routes eroded on strong competition to multi-year low while cargo yield also fell 7.6% despite higher freight carriage. 1QFY16 operating expenses dropped 5.2% YoY to S$3.5b mainly driven by fuel savings but once again partially offset by hedging loss of S$262.7m. Consequently, 1QFY16 PATMI improved 162.1% to S$91.2m. Stripping out the one-off income earned from the release of seven delivery slots, SIA 1QFY16 bottom-line could possibly be worse off than 1QFY15.

Fuel savings help amidst challenging times
Looking ahead, average hedged price for jet fuel needs will continue to decline (2QFY16 average hedged price is 5.5% QoQ lower at US$104/barrel) as the expensive hedging positions expire, assuming oil prices stay largely unchanged at the current price levels. Coupled with lower into-plane fuel cost, we expect net fuel savings to increase over the rest of FY16 but strengthening of USD against SGD will likely soften the effect. However, we expect increasing pressures on long-haul passenger yields (both business and economy classes) due to higher competition on its Americas and Europe routes, as gulf carriers continue to pursue aggressive capacity expansion (according to Centre for Aviation), particularly on the latter routes. While management saw traction on growth in short to medium-haul routes (i.e. Silkair, Tigerair and Scoot), we do not expect significant improvement until further industry capacity rationalization occurs.

Forecasts cut; maintain HOLD
Factoring in results, hedging positions as well as challenging outlook, we cut FY16/17F PATMI by 16.6%/18.7%. Consequently, our FV drops to S$11.27 (prev: S$11.59), which is based on 1.0x FY16F P/B (-0.25 SD 7-year mean). Maintain HOLD.

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