CFA Society Singapore
SINGAPORE (May 18): CGS-CIMB Securities is maintaining its “add” call on Singapore Airlines (SIA) with a target price of $11.75.
The airline company yesterday announced that it has reversed out of the red with 4Q18 earnings of $181.8 million, from losses of $138.3 million in 4Q17, as FY18 earnings more than doubled from a year ago to $892.9 million.
4Q17/18 revenue rose 8.2% to $4.02 billion, from $3.71 billion a year ago, on the back of stronger passenger and cargo flown revenue, partially offset by higher expenditure.
Over the past four quarters, SIA mainline’s core EBIT has been improving, as growth in revenue passenger kilometre (RPK) demand lifted loads y-o-y, while available seat kilometre (ASK) capacity remained flat. Its rate of yield declines had also started easing, before rising 1% y-o-y in 4Q18.
Core EBIT for SIA Cargo and Scoot has also been improving, but SilkAir reported significantly lower profits, as it had to discount heavily to fill up its expanded capacity base.
Operating profit for SilkAir was down by $58 million to $43 million in FY18 compared with the same period last year.
Meanwhile, SIAEC saw 4Q18 earnings increase by 19.8% y-o-y, but FY18 earnings fell primarily on lower fleet management revenue.
After five years of flat capacity, SIA mainline is now guiding for 5% ASK growth in FY129 as the group is confident that it has the right aircraft to expand, with the resumption of its non-stop Los Angeles and New York flights on the A350ULR, as well as the 787-10 and the regional A350-900 for medium-haul flights.
Fleet efficiency will also improve after the group removes several classic 777s.
In a Friday report, analyst Raymond Yap says, “We are banking on SIA mainline delivering matching 5% RPK growth in FY19F, with its new A380 and 787-10 products helping to grow its pool of customers.”
For the SIA group’s passenger business as a whole, SIA guided for “strong advance passenger bookings” and “continued stabilisation in yields” despite “intense competition and cost pressures”.
“We expect SIA mainline to build on the 1% y-o-y increase in 4QFY18 yields (the first yield increase in three years) as we head into FY19F,” adds Yap.
Furthermore, the rise in fuel prices would impact the group’s unhedged competitors more than itself, possibly leading to an industry-wide increase in ticket prices, which the group can ride on.
During FY18, Scoot and SilkAir grew capacity at around the same rate. However, SilkAir had to cut yields materially to maintains loads, while Scoot did not have to do so.
SIA this morning announced that its regional wing SilkAir will be merged into SIA after undergoing significant aircraft cabin upgrades with investment of more than $100 million.
The analyst views this merger as akin to the Scoot-Tiger merger earlier, as it will save operating costs and merge the booking platforms, as well as project a unified brand to customers.
“This is positive for the SIA group in the long term as it will have one LCC brand – Scoot – as well as one FSC brand – SIA,” says Yap.
“While SIA will still be negatively affected by pricier oil, its hedging position gives it a competitive advantage against Cathay Pacific, and the unhedged Chinese and Middle Eastern Gulf carriers,” he adds.
As at 12.40pm, shares in SIA are trading 19 cents higher at $11.33 or 1.0 times FY19 book value with a dividend yield of 1.80%.