SINGAPORE (July 30): OCBC Investment Research is maintaining its “hold” call on Singapore Airlines (SIA) with a lower fair value of $11.01 on falling cargo load factor (CLF) and implementation of new reporting standards SFRS.
To recap, SIA reported a 0.5% drop in revenue to $3.84 billion in 1Q19 from a year ago but saw a 52.3% fall in operating profit to $193.1 million as 1Q18 included non-recurring items of $175 million which were related to KrisFlyer breakage rate adjustments and compensation for changes in aircraft delivery slots.
See: Singapore Airlines shares fall as much as 5.5% after weaker airfares hit earnings
Excluding these, the decrease would have been 16.1%. Higher fuel costs also dragged down operating profit, such that earnings fell 58.6% to $140 million. Excluding one-off items in the prior year, net profit would have decreased by $53 million or 27.5%, below ours and the street’s expectations.
Passenger and cargo flown revenue increased by $178 million, outweighing the absence of the non-recurring items in 1Q18. The growth in passenger flown revenue was driven by an 8.3% increase in traffic, outpacing the decline in passenger yield. Cargo flown revenue was up $30 million as cargo yield rose 9.9%, albeit on lower loads carried. Revenue contribution by engineering services fell $19 million on lower airframe and line maintenance activities.
In a report last Friday, lead analyst Low Pei Han says she expects SIA’s passenger traffic to grow in the coming months in spite of continued competition in key operating markets, as well as cost pressures due to the higher fuel prices.
She also highlights that for the remaining 9M of FY19, the group has hedged 46.3% of its fuel requirements in MOPS (21.8%) and Brent (24.5%) at weighted average prices of US$65/bbl and US$54/bbl, respectively.
“Despite concerns over global trade tensions, management mentioned that cargo demand in the near term is steady, though any escalation of tensions could potentially have a longer-term impact on air cargo demand,” she adds.
Nonetheless, the analyst remains cautious of SIA Cargo’s cargo load factor (CLF) decline, which started in Mar 2018 and has continued till June 2018 – although the previous two months of Jan and Feb continued to register positive y-o-y growth in CLF.
“Recall that FY18 was a relatively good year for SIA Cargo,” notes Low.
As at 10.30am, shares in SIA are trading 1.3% lower at $10.09, or 17.9 times FY19F book.
