SINGAPORE (Feb 22): CIMB is reiterating its “add” recommendation on Singapore Airline (SIA) with a target price of $12.05.
SIA on Feb 13 announced that its 3Q earnings jumped 62% to $286.1 million from $177.2 million a year ago.
Revenue was 6.0% higher at $4.08 billion compared to $3.85 billion last year, attributed to revenue improvements in all business segments.
See: Singapore Air sees 3Q earnings soar 62% to $286 mil on higher operating profit and absence of Tigerair writedown
During the group’s post-results analyst meeting on Feb 14, senior VP of Finance, Stephen Barnes says that demand for airfreight and premium travel has remained robust so far this year, despite higher oil prices eating into profits in the past two quarters.
Full-service carrier (FSC) yields continued to fall y-o-y, although in the US and Europe, yields stabilised as airlines tried to pass on higher fuel costs.
In Asia, the group noted that the keenly competitive environment has prevented the industry as a whole from passing on higher fuel prices, with transpacific yields still feeling the effects of capacity additions by Chinese and other North Asian carriers.
In a Wednesday report, analyst Raymond Yap says that SIA has however has better success at holding up its yields in some markets, such as on European and to Chinese and North Asian destinations.
Better premium travel demand has helped stabilised yields on the group’s European routes, while aided by more manageable capacity additions on the Kangaroo route by the Middle East Gulf (MEG) carriers.
“As the MEG and Chinese carriers typically do not hedge their jet fuel costs, higher jet fuel prices in recent months should push these carriers in the direction of raising their ticket prices, in our view,” says Yap.
The analyst believes that if this materialises, the group should be able to follow the industry pricing upwards.
From 2HCy14 to CY16, the group suffered fuel hedging losses of $2.1 billion, as it had no choice but to match reduced ticket prices of its unhedged MEG and Chinese competitors. But the group managed to accumulate significant quantities of Brent derivatives in late-CY16 and CY17, locking up 40-47% of its fuel needs up to 2022F at a strike price of US$53-59/bbl.
Yap reckons that this will help the group improve its competitive position as oil prices rise.
In addition, the group is benefitting from its structural initiatives, though slowly, which will help slow the pace of its mainline’s yield declines.
As at 11.22am, shares in SIA are trading 13 cents lower at $11.16 or 0.96 times FY18 book, with a dividend yield of 1.79%.
