SINGAPORE (May 17): OCBC is maintaining its “buy” recommendation on Singapore Airlines (SIA) as improved fuel hedges and new aircraft lower unit cost at a time when yields are low.

Says lead analyst Eugene Chua in a Monday report: “We believe SIA’s improving fuel hedges couldn’t have come at a better time – a period of intense competition where weak yield environment is the result. In our view, the key factor is whether SIA’s declining unit cost from cheaper jet fuel is able to outpace the weak yields outlook.”

To recap, SIA’s FY16 core PATMI almost doubled to $701.6 million but still came in below the street’s and OCBC’s expectations, forming 92.2% of the latter’s FY16 forecast.

SIA’s FY16 revenue dipped 2.2% to $14.2 billion on lower yields at parent airline and its cargo business, yet this was partially offset by revenue growth from SilkAir and Scoot on capacity and carriage growth. FY16 net fuel cost declined 18.9% to $4.5 billion despite a 41.3% plunge in average jet fuel price, as it was partially offset by a 107.4% increase in hedging loss.

“We also expect more meaningful impact in FY16 from SIA enhancing connectivity between Scoot and Tigerair network,” says Chua. “All said, we expect decline in costs driven mainly by cheaper fuel to mitigate the weak yields environment.”

OCBC is lowering SIA fair value estimate to $12.00. At 10.43am, the stock is down 2.41% at $10.54.