Singapore Airlines

UOBKayhian on 17 Dec 2014

FY15F PE (x): 39.5
FY16F PE (x): 17.2

Weak traffic in peak travel period. November’s pax traffic (RPK) growth was uncharacteristically weak and load factors declined despite a cut in pax capacity. This suggests that the region still faces excess capacity. Singapore Airlines (SIA) indicated that demand to the Americas and Europe remain weak and that it will adjust capacity further to meet demand.

Still very much a play on lower fuel prices. SIA has hedged 60% of its 2HFY15’s fuel requirements at US$116/bbl and assuming that the remaining 40% approximates US$90/bbl, average jet fuel will approximate US$105/bbl, or 13% lower than that of 1HFY15, resulting in a savings of about S$380m. The bigger question is to what extent SIA has hedged its fuel requirements for FY16. Jet fuel currently is below US$80/bbl, while Brent crude is about US$60/bbl. Theoretically, SIA can hedge via Brent crude for longer-term contracts and thus lock in its fuel costs. Couple that with the delivery of more fuel efficient aircraft, FY16’s opex could drop substantially. For FY16, we have assumed an average jet fuel cost of US$100/bbl vs US$112/bbl for FY15. Maintain HOLD. SIA trades at 0.8x P/B, ex-SIAEC. At best, the stock could trade towards its long-term mean of 0.87x, which suggests a potential target of S$12.60 if fuel prices decline further. Suggested entry is at S$10.80.