SINGAPORE (Nov 14): Singapore Airlines reported an 81% decline in 2Q19 earnings to $56.4 million on higher fuel costs and lower passenger yield.

Including share of one-off losses of $116 million at associate Virgin Australia, 1H earnings fell 69% y-o-y to $196 million.

In a Wednesday report, DBS Group Research says with fuel prices at a substantially higher level currently, passenger yields need to improve for SIA to post returns equal or better than its cost of capital.

Meanwhile, Yong says SIA’s transformation programme has started to bear fruit as non-fuel costs across all segments have fallen and further gains from the programme could help to alleviate cost pressures and further optimise revenues

“We lower our FY19F and FY20F estimates by 31% and 23% respectively to reflect lower passenger yield assumptions and the one-off losses at Virgin Australia, and expect consensus to also cut forecasts,” says DBS’s Paul Yong.

DBS is downgrading SIA to “hold” and lowering its target price to $10.20 based on 0.85 times FY19F book.

CGS-CIMB Securities analyst Raymond Yap says SIA’s new revenue management system and philosophy of maximising revenue per unit of ASK capacity (RASK) has shown results, as the mainline carrier’s and Scoot’s RASK metrics have risen y-o-y for four straight quarters.

Yap expects Brent crude oil prices to rise in CY20F as a result of the IMO 2020 which will implement a 0.50% global sulphur cap on fuels. SIA’s efforts to pass on higher fuel costs will also be made more challenging by higher Changi airport taxes, a weakening business cycle, and investment losses for the new A350-900ULR direct, non-stop flights to the US.

CGS-CIMB has a “hold” with an unchanged target price of $10.10, based on 0.9 times CY19F book value, 1 s.d. below mean since 2001.

In 1Q19, Maybank KimEng had fears that yields would deteriorate given the challenging competitive landscape and also due to the spike in airport charges.

However, analyst Mohshin Aziz, in a Wednesday report, says SIA’s 2Q19 results quelled fears as the load factor is at a 10-year record while yields are holding up far better than other regional peers and cost items are largely within control.

Overall passenger yields declined by 4.5% y-o-y due to a challenging market and the impact of Changi Airport raising passenger charges by 39%. The cargo business however delivered a stellar 17.1% y-o-y yield growth.

Mohshin believes the risk-reward is balanced at the moment and hence recommends a “hold” on the stock for its dividends with target price of $9.80 pegged at 0.82 times FY20F book — 1 s.d. below its long-term mean.\

While Singapore Airlines is optimistic on the cargo earnings in the near term, UOB KayHian analyst K Ajith believes cargo yields and volume are likely to weaken by 1Q19 as semiconductor and handphone shipments are expected to decline.

Although 2Q19's results reflect a period of rising fuel costs, jet fuel prices have weakened since then and Brent crude prices have weakened despite Saudi Arabia's plans to cut production. This reflects concerns over weakening demand.

In the event that SIA's stock price declines in early trade, Ajith recommends clients to accumulate near $9.20-9.30.

UOB KayHian is maintaining a “hold” and a target price of $10.40, based on 0.75 times FY19's book value.

Year to date, shares in SIA are down 12% to $9.40.