Singapore Airlines - 1Q FY16 earnings: Net fuel price gains better than expected

Singapore Airlines (SQ) has reported a pre-ex NPAT of S$79 mn for 1Q FY16, up 86% on 1Q FY15 and ahead of our S$171 mn loss estimate while in line with consensus expectations of S$88 mn.

With revenue exactly matching our estimates, the source of the outperformance was fuel—our hedge losses proved correct, but we had underestimated the net benefit from falling prices. This was augmented by payments from Airbus for A350 delivery slots.

We have lifted our EPS estimates for FY16 and FY17 by 19% and 7%, respectively, to S$781 mn and S$683 mn to account for the fuel and other revenue contributions that have tracked ahead of expectations. We are ahead of consensus this year, but expectations of rising fuel prices in FY17 and the one-off nature of the slot sales mean that FY16 earnings will likely fade.

Every major core unit saw an improvement in this set of results and we expect the momentum to continue into 2Q FY16. We have raised our TP by 2% to S$13.15/sh to reflect the better earnings expectations; our OUTPERFORM rating is unchanged.

All divisions did better
SQ's first quarter saw revenue hit our expectations, although this was primarily because of a S$110 mn uplift stemming mostly from the release of seven A350-XWB delivery slots. This offsets yield declines at every unit except Tiger Air (TR), most of which was anticipated. The other major contributor to earnings was a net S$121 mn fuel savings that we had assumed would be lost to hedge book losses. This lay at the heart of the major (16% YoY) decline in unit costs, although SQ also beat on operating leased aircraft, where expense was 30% lower than anticipated given the pace of new aircraft inducted into the fleet (zero in net terms for the quarter).

Lower fuel prices impacted all of SQ's various units positively, although "others" recorded lower EBIT contributions because of losses associated with SQ's travel business. We welcome the additional disclosure around Scoot (TZ), which lost 20% less than it did last year and which—with more efficient B787s replacing old-tech B772s and lower fuel prices—could make a positive contribution this year. 

The biggest gain in contribution occurred in the parent company and resulted from the delivery slot-related income, although all units registered an improvement despite a challenging yield environment. The parent airline registered a flat yield outcome as it refused to rebate jet fuel surcharges to passengers, but suffered a decline in loads and traffic and we suspect that it will likely trim pricing over the next quarter to be more competitive. At the other end of the scale, the cargo business registered a significant (8%) decline as the benefits of the USWC port congestion on airline freight pricing that has positively affected the prior quarter ebbed away.


Technical Analysis
Daily Chart
Losses continued at Virgin Australia (VA), offsetting the benefits of TR's change in nomenclature from associate to subsidiary (and the removal of its modest loss contribution from this line item). SQ's Indian joint venture (Vistara) also contributed unspecified losses, which are likely to build throughout the year until it reaches adequate scale. There is an analyst briefing later this week (Friday, 31 July) where more details are likely to be given, but until then we are comfortable to nudge our estimates for this year ahead of consensus and retain our sanguine view of the stock as most of its previous loss-contributing units finally reverse course in the current year. (Read Report)

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Source : Credit Suisse Asia Pacific Equity Research

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