Predictably, SIA’s share price weakened after its 1Q results indicated that yields and loads were under pressure. But with the share price trading at close to S$10.60, which is at its support of 0.9x P/BV, or 1 s.d. below the average P/BV mean since 2001 of 1.1x, the downside is limited, and this could now be a good opportunity to accumulate. Our target is set at the P/BV mean and near-term upside catalysts include a lower price of jet fuel from 2H onwards, while medium-term catalysts include product retrofits and introduction of premium economy from Aug which should improve the yield mix, and fleet replacements that help lower unit costs. We maintain Add, but lower our FY16-18 forecasts 11-16% and reduce our target price accordingly.
At its analyst meeting, SIA highlighted that its monthly yields were showing pressures on a yoy as well as on a month-on-month basis (Figure 2), primarily on services to the US and Europe, reflecting aggressive capacity expansion by competitors. Passenger load factors also saw softness; despite SIA mainline reducing ASK capacity by 2.4% yoy during 1QFY15, RPK demand fell 4.2% yoy. Business class demand fell by more than economy class demand, leading to a negative mix effect which also weakened average yields. Services within ASEAN, and to Australia, had been less affected by yield pressures this time around, and SilkAir’s yields still managed a small 0.8% yoy increase while increasing capacity 7.2%. In contrast to SIA mainline, SilkAir’s PLF rose 0.6% pts yoy.
What We Think
The weakness in yields look likely to continue for the rest of the year and our previous SIA mainline yield forecast of 11.09 Scts/RPK for FY16 is now revised down to 10.98 Scts, down 2% from 11.20 Scts in FY15, and lower than even the 11.10 Scts achieved during FY14.
What You Should Do
There is no need to be overly pessimistic on SIA, especially at the current share price. Weak long-haul yields are a result of not just competition, but also the weak trade volume growth this year which tends to influence the level of long-haul business-related travel. We forecast a rebound in trade volumes next year that should help boost air travel demand. Also, fuel prices will finally decline more significantly for SIA in 2H to US$80/bbl, from US$94 in 1H, which could lift hoh earnings by an incremental S$365m. Not to mention that the 2H is the seasonal summer peak to Europe as well as the year-end school and Christmas holidays in Singapore. (Read Report)
Source : CIMB Research