Singapore Airlines - 2Q FY3/16 earnings preview: Fuel and affiliates make the difference

Singapore Airlines (SQ) will announce its 2Q FY3/16 earnings after market close tomorrow evening (5 November), with an analyst meeting to be held the following morning.

We expect pre-ex NPAT of S$150 mn, up 77% on last year and in line with a thinly populated Bloomberg consensus of S$158 mn on revenue growth of 3%.

With group traffic data already released, the outstanding keys to the result lie in affiliate contributions where we believe that the large earnings drags from 2Q FY3/15 (Tiger Air (TR), Scoot (TZ) and Virgin Australia (VA)), should all reverse, with lower fuel prices providing a net benefit, despite anticipated hedge losses. Unhelpful currency moves are expected to have pressured parent revenues and hit group costs, while cargo revenues continue to dwindle on lower yields.

We continue to believe that SQ's earnings have growth potential ahead of market estimates and anticipate upward revisions will sustain its positive performance. Our OUTPERFORM rating is unchanged as is our TP of S$13.15/share.

It’s a family affair
While we expect parent company (SQ) and cargo revenues to decline in 2Q FY3/16, the inclusion of revenues from TR's consolidation, TZ's fleet and network size nearing critical mass and sustained growth in revenue along with a double-digit lift in MI's revenue, we are looking for overall top line expansion. Indian joint venture Vistara (UK) will likely be the only airline affiliate to post meaningful losses (as it struggled with a 2Q load factor of ~62%), with Virgin Australia (VA) expected to reverse last year's losses as it benefits from low fuel prices and the spirit of détente that has characterised Australian aviation thus far in 2015. Lower jet fuel surcharges (in some jurisdictions) will have weighed on SQ yields, along with the effect of weaker currencies the sale of inbound fares out of Japan, Korea, Australia, Indonesia and Malaysia.

Currency will also have impacted group costs negatively, with the SGD falling 11% vs. the USD in the September quarter, in which currency ~55% of its costs are denominated. Notwithstanding this, we do expect a 12% drop in unit costs (before jet fuel hedge losses) to reflect both ongoing efficiency, but primarily the 43% decline in the price of international jet kerosene.

While SQ should generate gross savings of close to S$300 mn compared with 2Q FY3/15, this falls to a S$77 mn net gain once an estimated S$243 mn in hedge losses are backed out.

Technical Analysis
Daily Chart
Aside from jet fuel the other major movements in opex are likely to be those most affected by the USD, with lease expenses, landing and parking charges and maintenance showing the biggest uplift, while wages should remain reasonably flat as SQ's head count growth lags its capacity growth. (Read Report)

Source : Credit Suisse Asia Pacific Equity Research

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