● Singapore Airlines (SQ) has reported a pre-ex NPAT of S$79 mn for
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
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.
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
Labels: Aerospace Sector, Singapore Airlines