SINGAPORE (Feb 20): Despite strong demand outlook, OCBC wants to see more consistency in the stabilisation of yields for Singapore Airlines before jumping in and is looking for opportunities to accumulate at $10 and lower.
"Looking ahead, OCBC expects the strong passenger and freight traffic growth to sustain on the back of broad-based global economic growth outlook, resulting in stabilisation of yields," says lead analyst Eugene Chua in a recent report who has a $10.85 fair value for SIA.
While Chua expects net fuel costs to be higher in 4Q18 and into FY19, SIA says it is unlikely to fully pass the increase in input costs to passengers due to the competitive landscape on some of SIA’s key routes.
And while Gulf carriers seem to be rationalising capacity on the kangaroo routes, he remains cautious with the return of Qantas to serve direct flights between Singapore and Europe. Management also noted yields on transpacific routes remain soft as the three main Chinese airlines continue to add capacity.
To recap, revenue for Singapore Air’s 9M18 ended Dec 2017 grew 5.7% y-o-y to $11.79 billion on stronger passenger and cargo flown revenue driven by passenger traffic growth as well as higher freight carriage and yield.
9M18 operating expenses increased 3.6% y-o-y to $10.95 billion, driven mainly by higher staff costs, handling charges, higher net fuel costs on higher average jet fuel prices, and higher depreciation.
In addition, all major entities in SIA group except SilkAir reported improved operating results as SilkAir’s higher costs and expansion in operations outstripped revenue growth on weaker yields. Consequently, stripping out one-off items recorded in 9M17 and 1Q18, 9M18 core PATMI beat OCBC's expectations as it jumped 42.2% y-o-y to $538.1 million, and formed 95.8% of OCBC's FY18 forecast.
As at 3.02pm, shares in SIA are down 14 cents at $11.22 or 15.2 times FY18 earnings.
