Singapore Airlines - 2Q FY3/16 results: Solid numbers—gains and pressures where expected


Singapore Airlines (SQ) has reported a pre-ex NPAT of S$180 mn for 2Q FY3/16, up 150% YoY and 20% ahead of our S$150 mn expectations and consensus of around the same. Reported profit of S$214 mn was 135% ahead of the previous year.

Revenue fell short of expectations on lower parent yields, but better fuel costs and lower affiliate losses offset this. EBIT and EBITDAR matched our estimates, but the bottom line was flattered by a large dividend receipt, which drove most of the beat.

While revenue pressures are expected to remain, we perceive a sharp reduction in jet fuel costs likely to accelerate during 2HFY3/16 and into FY17 as expensive hedges roll off. Coupled with better affiliate contributions, we have lifted our estimates 10% this year and 54% next as we also incorporate our recent reduction in Brent price expectations.

We retain our OUTPERFORM rating for SQ and have lifted our TP by 6% to S$14 from S$13.15, based on a target EV/CFMV of 135% and equivalent to a forward EV/EBITDAR of 4.8x.

The song remained the same
As we highlighted in our recent note (2Q FY3/16 earnings preview: Fuel and affiliates make the difference, 4 November), we expected the benefits of a drop in the price of jet kerosene and greater contributions from outside of the core parent operations to more than offset sluggish growth and pressure on yields in SQ's more mature activities. And so it transpired. While revenue shrank 2% on a worse-than-expected 5% drop in parent (SQ) yields and a 9% dive in cargo pricing, a 27% drop in the average price of jet kerosene and enhanced fuel efficiency largely offset this. Subsidiary LCC players, Tiger (TR) and Scoot (TZ) both flirted with operating profitability (having both contributed substantial losses in 2Q FY3/15), the cargo division likewise lost only S$3 mn and Silkair's (MI) profit septupled to S$21 mn. An unexpected 2Q dividend of S$88 mn rounded off the company's performance, allowing it to declare a S$0.10/share dividend itself (unchanged from last year).

Adjusting for SQ's jet fuel hedge losses (which we include below the operating line), unit costs declined 15% YoY, slightly less than anticipated as the strength of the US$ impacted lease costs (up 30% YoY), handling (+10%) and offset some of the benefits of a lower jet fuel price. The company also lost some of the fuel benefits in its yields, especially at the parent company, where competitive pressures forced it to lower fares as airlines essentially rebate much of the "oil dividend" to passengers rather than shareholders. We also believe that the strength of SG$ relative to other regional currencies had a negative effect on ASPs.

Technical Analysis
Daily Chart
A reduction in our yield estimates over the balance of the year for SQ is the biggest change to our estimates, with this more than offset by the unexpected dividend and better fuel prices than previously assumed. Passenger yield we now see down 4% in FY16E (vs. prior 1%), with spot jet kerosene (including into wing costs) at US$72/78/95/bbl FY16/17/18E, down from US$78/95/102/bbl. Ongoing performance from TZ/TR/MI in 2H is also anticipated as restructuring efforts at the two LCCs bear fruit and regional full-service growth increasingly migrates to MI. There may be further changes following tomorrow's analyst briefing, but we expect most estimate revisions to be positive and for our 20% higher-than-Street EPS expectations to be narrowed as this occurs. (Read Report)

Read Related Reports
1) Singapore Airlines - Mainline carrier disappoints by CIMB Research, published on 6 November 2015

2) Singapore Airlines - Hold: Non-operating items boost a lacklustre 2Q16 result by HSBC Global Research, published on 5 November 2015

Source : Credit Suisse Asia Pacific Equity Research

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