• Passenger yield grew for the first time in three years
• Improving yields and stringent cost management to help offset higher jet fuel costs
• Maintain BUY with S$13.70 TP (1.2x FY19 P/BV)
Reiterate BUY as we see SIA benefitting from a synchronised global economic recovery. We are more upbeat on the outlook for SIA as it should benefit from strong travel demand from the synchronised global economic recovery, which should keep load factors firm and improve passenger yields for its flagship segment. Passenger yield for its flagship segment finally turned up by 1% y-o-y in 4QFY18, its first growth in 3 years – a key inflexion point. Load factor also reached a high of 81.1% in FY18 for this segment.
Where we differ: We have higher-than-consensus forecasts as we have factored in a 2-3% yield improvement per annum in FY19F and FY20F for SIA’s flagship passenger business. We have also assumed that SIA will adjust its accounting policy, with the implementation of IFRS (1).
Potential catalysts: SIA’s share price could re-rate further on the back of yield recovery, sustained improvement in revenues, and ongoing cost management initiatives to lower its operating costs.
Longer-dated Brent hedges pay off to mitigate higher jet fuel prices. While jet fuel prices have moved higher y-o-y, SIA is in a better position than most airlines as it has put in longer-dated Brent hedges with maturities up to FYE March 2023, covering c. 45% of the group’s projected annual fuel consumption, at an average effective price of around US$65 per barrel for jet fuel.
Raised TP to S$13.70 based on 1.2x FY19 P/BV, on the back of an improved ROE to 9%. SIA last traded up to and above 1.2x P/B in early 2011 when its ROE for FY11 was 9.4%. The stock offers decent dividend yield of 3.6%, which we expect will rise to 4.5% assuming a higher dividend payout of 50% in the next two years.
Key Risks to Our View:
Vulnerable to demand shocks and/or fuel price increase. With operating margins at razor thin levels, SIA is vulnerable to any demand shocks and/or an increase in fuel prices.
Source : DBS Group Research