Maintain BUY; MERS concerns are overblown whilst lower fuel
costs will provide concrete boosts to SIA’s bottom line
SIA has underperformed (-12%) the STI (-5%) over the last 8
weeks, due to concerns over the impact of MERS, which are
overblown, in our view
. We maintain our BUY call on SIA with
23% upside to our target price of S$12.80, as earnings improve
on lower fuel costs, particularly from 2QFYMar16 onwards.
Fuel cost savings to be more substantial from 2H CY15
onwards, which should drive better earnings recovery
SIA has hedged 58.5% of its fuel requirements for the current
quarter at US$110/bbl, and c. 45% of its fuel requirements for
the full year at less than US$106 per barrel, implying that fuel
cost savings will be more substantial for SIA from 2Q onwards.
We project SIA’s earnings to more than double to S$763m in
FY16F and grow further to S$1,105m in FY17F.
Earnings risk is on the upside if jet fuel stays below US$90/bbl
for a sustained period
We have assumed an average jet fuel price of US$90 per barrel
for SIA in FY16 and FY17, compared to the current price of c.
US$75/bbl. If fuel prices do not move up further for a sustained
period, there should be further upside to our earnings
estimates. Each US$1 savings on average jet fuel price boosts
SIA’s earnings, ceteris paribus, by S$50m per annum.
Re-rating towards our TP of S$12.80 as earnings improve
Our S$12.80 target price is based on 1.1x FY16 P/BV, which is
its historical mean and reflects SIA’s improved earnings outlook.
With net cash of c. S$3.40 per share, we see current valuation
of 0.9x FY16 P/BV as an attractive entry level for investors.
Key Risks to Our View:
Vulnerable to demand shocks and fuel price increase
SIA is susceptible to demand shocks such as economic outlook
or pandemics e.g.
if the MERS situation hits Singapore like SARS
did back in 2003. However, share price did rebounded quickly
even during SARS once the situation was under control. Fuel
costs account for over a third of SIA’s operating costs and
should oil prices spike sharply, it would impact on earnings. (Read Report)
Source : DBS Group Research
Labels: Aerospace Sector, Singapore Airlines