Singapore Airlines

PHILLIP SECURITIES RESEARCH on 7 March 2012

THE Singapore Airlines (SIA) Group comprises three main business segments: passenger, cargo, and aviation MRO (maintenance, repair, and operations) services. The parent company, SIA, operates more than 100 aircraft to a global network of destinations.

Tiger Airways announced plans to set up a second base in Sydney, with operations expected to commence from early July 2012.

Sector limits imposed by CASA would also be gradually lifted and Tiger Airways Australia (TAA) would be able to operate to a maximum of 64 (current: 38) sectors per day from October 2012. Previously, SIA also announced an increase in fuel surcharge of US$2-28 per sector for flights on SIA & SilkAir and SIA Cargo's freighter capacity would be reduced by 20 per cent in response to weaker demand.

The developments are positive for Tiger Airways. We also think that the establishment of a second base by TAA in Sydney could have strategic implications to SIA's new long-haul budget carrier, Scoot.

Scoot previously announced that they would fly to Gold Coast & Sydney from mid-2012. Hence, we believe that there is potential for development of a budget network for SIA and its affiliates, with Tiger Airways and Scoot collaborating for traffic feed into each other's network in Australia.

The codesharing scheme between SIA and Virgin Australia would provide the full service network alternative for the less budget conscious travellers.

The increase in fuel surcharge is a necessary move to combat the current high jet fuel prices (about US$135/bbl, +10.7 per cent year- to-date) and is the fifth round of increase since December 2010.

As the announced freighter capacity reduction of 20 per cent does not involve the bellyhold capacity in SIA's passenger fleet, we reckon that the effective cargo capacity reduction would probably be half.
Cargo yields could be protected with the capacity reduction. With the dynamic nature of the cargo business, we believe that a quick restoration of cargo capacity is possible, if demand unexpectedly strengthens.

We have little conviction in a near-term re-rating for SIA's stock price with the ongoing challenges facing the airline industry. However, we also see little downside for the stock price at such depressed valuations. Maintain accumulate.
ACCUMULATE

Singapore Airlines

OCBC Research on 3 Feb 2012


After today’s 3QFY12 results briefing with Singapore Airlines’ (SIA) management, we learned there is a current overall weakness in advance passenger bookings and the weakness cannot be solely attributed to premium or economy seats. Geographically, demand seems especially weak in flights to Europe. In the air cargo segment, management attributed SIA Cargo’s operating loss of S$40m to the usual peak shipping season that failed to materialise in 3QFY12. Despite pockets of strength in global purchasing manager indices, management provided a gloomy outlook for its air cargo business and guided cargo yields to continue falling in the current quarter. We maintain our fair value estimate of S$10.85/share, which has already factored in the challenging times the aviation sector is currently facing, and HOLD rating on SIA.

Weak advance passenger bookings. After today’s 3QFY12 results briefing with Singapore Airlines’ (SIA) management, we learned there is a current overall weakness in advance passenger bookings and the weakness cannot be solely attributed to premium or economy seats. Geographically, demand seems especially weak in flights to Europe. Management reckons SIA’s bigger exposure to premium seats makes its products less price elastic. However, recent cuts in corporate spending have downsized corporate air travel. Thus, SIA expects passenger yields to remain under pressure in 4QFY12.

Cargo segment has gloomy outlook. In the air cargo segment, management attributed SIA Cargo’s operating loss of S$40m to the usual peak shipping season that failed to materialise in 3QFY12. This lack of a peak season is similar to the one experienced in sea freight. Despite pockets of strength in global purchasing manager indices, management provided a gloomy outlook for its air cargo business and guided cargo yields to continue falling in the current quarter.

New PATMI estimate still below consensus. Post today’s results briefing, we have increased our revenue and PATMI estimates for SIA in FY12 to S$14.7b and S$404m respectively. Our new FY12 revenue estimate is in-line with consensus but our new FY12 PATMI estimate is 23% lower than consensus. We reckon 4QFY12 will still be a tough quarter for SIA because jet fuel prices so far in this quarter have stubbornly remained high and are even averaging slightly higher QoQ.

Maintain HOLD and fair value. We maintain our fair value estimate of S$10.85/share, based on an adjusted ex-net cash P/B multiple of 1x and has already factored in the challenging times the aviation sector is currently facing, andHOLD rating on SIA.

Singapore Airlines

OCBC Research on 3 Feb 2012


Singapore Airlines (SIA) last night reported its 3QFY12 revenue grew 1% YoY to S$3.9b but PATMI fell 53% YoY to S$135m. Persistently high jet fuel prices caused SIA’s fuel costs to jump 35% YoY to S$1.5b. All of SIA’s business segments contributed lower operating profits from a year ago. The parent airline (Singapore Airlines) recorded an operating profit of S$137m, from S$378m a year ago. SIA Engineering’s operating profit shrank 18% YoY to S$28m, while SilkAir’s operating profit decreased 29% YoY to S$32m. SIA Cargo reported an operating loss of S$40m, swinging from an operating profit of S$48m in 3QFY11. Pending today’s briefing with management, we put our fair value estimate of S$10.85/share and Hold rating on SIA UNDER REVIEW.

Revenue edged 1% ahead but PATMI fell 53% in 3QFY12. Driven by a marginal growth in passenger revenue, Singapore Airlines’ (SIA) eked out a 1% growth in 3QFY12 to record revenue of S$3.9b. Persistently high jet fuel prices, which we have mentioned numerous times in our earlier reports, were a big factor that caused its PATMI to fall 53% YoY to S$135m. Fuel costs jumped 35% YoY to S$1.5b, driven by jet fuel prices that were 30% higher.

All segments’ profitability worsened. In 3QFY12, all of SIA’s business segments contributed lower operating profits from a year ago. In 3QFY12, the parent airline (Singapore Airlines) recorded an operating profit of S$137m, versus S$378m a year ago. SIA Engineering’s (SIAEC) operating profit shrank 18% YoY to S$28m, while SilkAir’s operating profit decreased 29% to S$32m. SIA Cargo reported an operating loss of S$40m, swinging from an operating profit of S$48m in 3QFY11.

FY12 PATMI likely to miss consensus estimate. For 9MFY12, SIA recorded revenue of S$11.2b and PATMI of S$374m, representing 76% and 72% of consensus FY12 revenue and PATMI estimates respectively. SIA’s FY12 PATMI will likely miss consensus FY12 estimate, unless it goes on to record a blockbuster quarter in 4QFY12. But given the gloomy outlook management has painted for the rest of FY12, a miss is more likely than not. Management said the uncertain global economy has caused weakness in advance passenger bookings. In addition, purchasing manager indices across the globe have slid further, resulting in a weak air cargo market. Thus, passenger yields are expected to remain under pressure and cargo yields are to continue falling. To exacerbate matters, jet fuel prices have stubbornly remained high. Thus, we expect another round of FY12 PATMI estimates downgrade by the street.

Rating under review. Pending today’s earnings briefing with management, we put our fair value estimate of S$10.85/share and Hold rating on SIA UNDER REVIEW.

Singapore Airlines

Kim Eng on 3 Feb 2012


Lower earnings, but earnings nonetheless. Singapore Airlines (SIA) posted 3QFY Mar12 net profit of $135.2m, a 53% decline over 3QFY Mar11. Despite the erosion, we contend that posting profits in such a challenging environment was a creditable performance. While the numbers were slightly below expectations due to sustained high fuel prices, we still see SIA as the airline best-positioned to emerge into strength from the current downturn. We maintain our Buy call and target price of $14.40. Our valuation of 1.2x P/BV is based on SIA’s robust balance sheet.


Revenue sustained in a seasonally strong quarter. Revenue was up 1% YoY in the seasonally strongest holiday quarter, with passenger yields sustained at 12.1cts pkm. Passenger load factors, however, did decline due to additional capacity coming on-stream. Cargo load factors remained flat but yields declined. SilkAir remains the star performer, with load factors hovering around 80% and yields up 4%.


Costs up due to fuel. Unit costs were up across all segments, with the main culprit being fuel. SIA’s fuel bill for the quarter rose 35% YoY to $1.5b; however, the run rate is consistent with the previous quarter, after factoring in additional capacity during the peak season. Overall, other operating costs were well contained. Notably, SIA also posted a rare $11.9m loss on the disposal of aircraft and spares.


Most units profitable. In summary, the parent airline posted an operating profit of $137m, SIA Engineering recorded an operating profit of $28m, while SilkAir’s stood at $32m. Cargo remained in negative territory, with an operating loss of $40m. Based on this earnings scorecard, we are trimming our FY Mar12 forecasts by just 3.5% to $512.7m, while FY Mar13 and FY Mar14 forecasts are largely unchanged.
No change to our outlook. With operating earnings volatile and near breakeven, we retain our asset-based valuation of SIA. Our target price is unchanged at $14.40, based on 1.2x P/BV. We will provide further updates following today’s analysts’ meeting with management.

SIA

OCBC Research on 17 Jan 2012

Singapore Airlines (SIA) reported its Dec 2011 operating statistics. The parent airline’s passenger capacity (ASK) increased by 3.2% YoY while its passenger traffic (RPK) gained a smaller 1.8% YoY, resulting in passenger load factor (PLF) falling to 79.6%, compared to 80.7% in Dec 2010. With its ASK already up 3.3% YoY in 3QFY12, SIA is unlikely to achieve management guidance of 2HFY12 ASK similar to that of 1HFY12. We maintain our fair value estimate of S$10.85/share, which has already factored in the challenging times the aviation sector is currently facing, and HOLD rating on SIA.

December 2011 operating statistics.
Singapore Airlines (SIA) last night reported its Dec 2011 operating statistics. The parent airline’s passenger capacity (ASK) increased by 3.2% YoY while its passenger traffic (RPK) gained a smaller 1.8% YoY. As a result, it recorded a passenger load factor (PLF) of 79.6%, compared to 80.7% a year ago. SilkAir’s RPK again gained a strong 7.6% YoY but it recorded an even faster ASK growth of 9.3% YoY. Thus, SilkAir’s PLF also fell to 83.1%, lower than the 84.5% in Dec 2010. SIA Cargo’s freight capacity (AFTK) grew 1.3% YoY and its freight traffic (FTK) edged ahead by 1.5% YoY. SIA Cargo’s freight load factor (FLF) improved marginally to 63.6%, from 63.5% in Dec 2010.

Falling passenger load factor caused by faster capacity growth.
At the 2QFY12 results briefing, management guided that SIA’s ASK in 2HFY12 should be similar to that of 1HFY12. This can be achieved if ASK does not grow more than 1.5% YoY in 2HFY12 but it is looking unlikely since ASK is already up 3.3% YoY in 3QFY12. At this point, SIA needs reduce the parent airline’s ASK by 0.5% YoY in 4QFY12 in order to achieve management’s guidance.

Persistently high jet fuel prices mean depressed margin.
In 3QFY12, jet fuel prices (JETKSIFC Index) adjusted to SGD averaged 4% higher than in 2QFY12. Since fuel cost is the single largest contributing factor to total operating expenses, persistently high jet fuel prices are likely to continue depressing the parent airline’s profit margin, especially when PLFs have been falling YoY since Aug 2010.

Maintain fair value of S$10.85 and HOLD.
We maintain our fair value estimate of S$10.85/share, which has already factored in the challenging times the aviation sector is currently facing, and HOLD rating on SIA.

SIA

OCBC Investment Research in a Dec 2 research report says: "The Australian Competition and Consumer Commission gave the final approval to the alliance between Singapore Airlines (SIA) and Virgin Australia (VBA), Australia's number two carrier. "On top of code-sharing on one another's international and domestic flights under this alliance, SIA and VBA will be able to work together closely on schedule planning so as to provide passengers with seamless flight connections. VBA sees this alliance as a way to capture a larger market share of the lucrative business travel segment from Qantas Airways (QAN), Australia's flag carrier. "While the alliance with VBA is a positive development for SIA, it is too early to quantify its impact to SIA's bottom line. We maintain our fair value estimate of $10.85. MAINTAIN HOLD."