• We expect Singapore Airlines’ (SIA) 3QFY18 headline net profit to rise 74% yoy and core net profit to rise 26.6% yoy, underpinned by higher profits from parent airline and SIA Cargo. In 3QFY18, pax loads increased 3% yoy for the parent airline as traffic growth continued to outpace capacity due to stronger passenger demand during the year-end peak period. The growth in profit would be partially driven by SIA’s “efforts to stabilise yields”, as every 0.1 cent rise from our base yield assumption of 10.40 cents is expected to improve 3QFY18 PBT and net profit by 7.2% and 6.9% respectively. In comparison, Taiwanese carriers reported yield growth of up to 4-6ppt over the same period.
• High load factors and strong yields expected to drive SIA Cargo’s operating profit. In 2QFY18, SIA Cargo registered a 236% yoy jump in operating profit (reversing from a loss in 3QFY15), led by yield growth of 9.1% and a 2.8ppt increase in load factors. We expect a similar rate of growth in earnings for 3QFY18 and we are partially guided by the strong 15-22% yoy increase in cargo yields by Taiwanese carriers over the same period. On the slightly negative side, we note that there was a 5ppt decline in loads for the Americas in Dec 17 and this could lower yields for the month as the region is a highyielding market. Every 1 cent rise from our base yield assumption of 28.7 cents is expected to improve 3QFY18 PBT and net profit by 5.6% and 5.3% respectively.
• SilkAir and Scoot could underperform parent airline in 3QFY18. Although all airline subsidiaries reported significant improvements in pax traffic for the quarter, SilkAir’s and Scoot’s operating profits could decline amid rising fuel cost. In 2QFY18, SilkAir’s operating profit fell while the parent airline’s rose, as SilkAir reported a 10.5% yoy decline in pax yields.
• SIA could report minor fuel hedging gains in 3QFY18. We assumed SIA could report S$20m in fuel hedging gains at the parent level vs a hedging loss of S$42.2m in 3QFY17. SIA had guided that it had hedged approximately 49% of its fuel requirements for 2HFY18 at about US$65/bbl on jet fuel (including Brent contracts) and has long-dated Brent contracts until FY23 at US$53-59. Comparatively, jet fuel prices averaged US$66.30 in 3QFY18.
• We expect SIA to meet earning expectations, largely driven by the parent airline and SIA Cargo. Yields could improve by a better-than-expected quantum. Most notably, cargo yields could increase by much more than our estimate of 5.1%, as seen in the numbers reported by Taiwanese carriers. On a negative note, airline subsidiaries are expected to underperform the parent airline if yields do not rise in tandem with unit costs.
• Proposed 30% increase in landing fees is a concern. If landing fees rise by 30% out of Singapore, this could reduce our FY19 net profit estimate by 15%. Based on our estimates, SIA must raise average ticket prices by 1% to commensurate the rise in expenditure. In comparison, landing and parking charges for the parent airline rose 4.8% yoy and accounted for more than 5.9% of the total costs in 1HFY18.
• Some of the questions that we will pose to management at 14 February’s results briefing include:
a) The reasons behind the 5% decline in cargo loads to the Americas in Dec 17.
b) Impact of the 30% increase in landing and parking fees. Will it be introduced gradually or immediately.
c) To elaborate on any plans or partnerships for the digital transformation.
d) Outlook for pax and cargo yields, and impact from a strong Singapore dollar.
• No change to our net profit estimates.
• Maintain BUY and target price of S$11.90. We continue to value SIA at 0.9x P/B.
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• Improving pax and cargo yields.
• Strong 3QFY18 earnings. (Read Report)
Source : UOB KayHian Research