Friday, November 4, 2016


SIA reported a 70% plunge in 2QFY17 net profit to $64.9m amid a sluggish global economy and aggressive that weighed on passenger fares and yields.

The disappointing results brought its 1HFY17 earnings to US$321.5m (+5.5%), which was lifted by asset disposal gains and one-off revenue credits.

Group revenue of $3.65b (-5.1%) was dragged by weaker passenger carriage (-4.6%) and yields (-3.8%) at the parent airline, as well as a slide in operating metrics at SilkAir (carriage: +4.1%, yield: -6.8%).

This was partially mitigated by improved performances from low-cost carriers Scoot (carriage: +51.9%, yield: -7.4%) and Tiger Airways (carriage: -4%, yield: +1.5%). Cargo loads jumped 8.2% but yields collapsed 15.7%.

Operating profit fell 17.9% to $109.1m as a 22% drop in in fuel costs failed to fill the gap left by the revenue slump. Of this, the parent airline contributed $79m (-19.4%) and SilkAir $17m (-19%), while Scoot and Tiger Airways turned around to deliver profits of $5m and $3m from losses of $2m and $10m respectively.

Not surprisingly, SIA Cargo widened its loss to $11m (+267%), while SIA Engineering suffered an earnings dip to $25m (-7.4%).

On top of the weak operating profit, the group had to content with:
1) Lower dividend income of $3.5m (-96.2%) due the absence of a special DPS from Everest Investment
2) $20.8m in impairment on two Scoot's B777-200 aircraft
3) $17m loss (2QFY17: $0.9m gain) from associates

Notably, operating cash flow slid 31.8% to $419.2, crimping its net cash balance to $2.12b (2QFY16: $2.62b). Consequently, the group declared lower interim DPS of 9¢ (2QFY16: 10¢).

The outlook for SIA remains tepid as excess capacity and aggressive pricing by Mid-East rivals and LCCs continue to exert pressure on both passenger and cargo loads and yields amid challenging conditions with increasingly budget conscious customers.

Fuels costs continue to be volatile and there are doubts whether OPEC would be united enough to follow through on its proposed production cut later this month. For 2HFY17, SIA has hedged 29.3% of its jet fuel requirements at a weighted price of US$68/bbl against US$81 for 2QFY17.

The only rainbow lies with Scoot and Tiger Airways, which showed signs of turnaround. The latest move to integrate the two budget carriers under the Scoot brand and operating licence could help enhance synergies and reduce administrative costs. The integration is expected to be realised in 2H17.

While SIA is currently trading at its floor valuation of 0.9x P/B, Maybank KE does not see an investment case for the stock given the near-term headwinds and unfavourable demand-supply dynamics of the industry. The house reiterates its Hold rating and TP of $9.70.

The street is Neutral on the counter with 4 Buy, 11 Hold, and 4 Sell ratings and consensus TP of $10.25.

Latest broker ratings:
CLSA maintains Sell with TP of $8.50
Morgan Stanley maintained Underweight with TP of $9.47
Deutsche maintains Hold with TP of $9.80
Maybank KE maintained Hold with TP of $9.70
UOB Kay Hian maintained Hold with TP of $10
Credit Suisse maintained Neutral with TP of $10.10
OCBC maintains Hold but TP of $10.80 under review
CIMB maintained Hold but cut TP to $10.47 from $12.67
Nomura maintained Neutral with TP of $11.53
Macquarie maintains Outperform but cut TP to $12.20 from $13

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