[FIDES ASSETS: SINGAPORE AIRLINES – SGX)
30th May 2019
Action: Maintain HOLD for SINGAPORE AIRLINES (C6L.SI) listed on SGX
Singapore Airlines is Singapore’s flag bearer, flying to more than 50 destinations in more than 30 countries. They have been awarded Best Airline in 2018 by Traveller’s World Magazine and Skytrax. The Company has an existing market capital of SGD$11b, with a 52-week high of SGD$11.69, and 52-week low of SGD$9.09. The current share price of today, as approximate at SGD$9.12.
Target Price: SGD$9.50
Conservative Entry Price: SGD$8.70
Upside: +4% (close approx.)
Although fourth quarter 2019’s earnings beat market expectations, we believe that the company might not perform well in the upcoming quarters as there are already signs of a slowdown in demand for air travel. This is further hammered by decreasing air cargo volume and yields. Furthermore, the grounding of its’ Boeing 737 air crafts remains the biggest exposure as SIA is dependent on local and foreign aviation authorities for clearance to operate (https://www.marketwatch.com/story/asian-airlines-growth-hindered-by-boeing-737-max-8-woes-2019-05-06).
Core profit-before-tax (PBT) was aligned with street expectations. The Company recognised SGD$59.8m as a one-off expense, related to the re-fleeting and restructuring of one of its’ wholly-owned subsidiaries, Silk Air. Our estimated operating profit of SGD$260m was in close proximity to actual operating profit of SGD$254m. Key variations at profit-before-tax (PBT) was due to better joint-partnerships and associated earnings. SIA declared a final dividend of SGD$0.22, which is a glaring -27% decrease to prior periods. The biggest impact was the fine of SGD$140m (close approx.). Setting that aside, SIA’s operating cash flow grew 2% year-on-year.
SIA’s revenue per available seat-kilometre (RASK) was a positive +1% year-on-year with an additional note that RASK would have increased by an impressive +3.6% year-on-year if it was on a consistent currency basis.
The Company was initially prepared to receive the said Boeing 737 air crafts from Silk Air to meet demand, however the air crafts were grounded. SIA has since made alternative plans to potentially lease air crafts to meet demand.
We would like to repeatedly emphasise on why the matter of the Boeing 737s holds a key tail risk. We explain and substantiate our view below. As Boeing awaits the US FAA approval on the Boeing 737, and if approval is obtained from the FAA and other aviation authorities, airlines can then start operating the aircraft by third quarter 2019. However, the clear risk in this aspect is any further delays or slowdowns for approvals to be implemented, should the aircraft be deemed flight-worthy. This could in turn affect the firm’s ability to fly to its’ wide-ranging variety of destinations. Additionally, let’s not forget the adverse tail-end risk of airlines cancelling their Boeing 737s orders, where it is already evident from Indonesia’s Garuda cancellation of the said orders (although SIA’s CEO has confirmed the orders remains “intact”: https://finance.yahoo.com/news/singapore-airlines-says-order-31-033515061.html?.tsrc=applewf). With 6 of Silk Air’s Boeing 737s being grounded, and the carrier having another 31 as outstanding orders, with 9 poised for delivery in 2020.
In other aspects, there are clear signs of weakening traffic, as such, yields is highly unlikely to improve in 2020. This is substantiated by weaker domestic pax traffic for both China and India and in Singapore. The world’s greatest airport – Changi Airport, reported that the airport’s pax throughout March 2019 was simply just 1/4% year-on-year. This is likely to impact SIA’s throughput in 2020, which could also affect pricing ability.
Lastly, we mentioned above that there is weakening cargo traffic, and this is mainly caused by the latest China-US tariffs. Affected goods includes electronic equipment, apparels, fresh and frozen food – items which are generally carried on air. Technology goods in particular, have higher value-per-tonnage, and are likely to impact yields more vigorously. The impact on yield would further hammer the already-weaken air cargo demand. Therefore, we firmly believe that both volume and yields would be adversely affected greatly.
Fides Assets’ Recommendation
We project a net profit of 5.5% for 2019, but lowered our projected net profit in 2021 by 15.2%, due to higher financing costs. Hence, we maintain a HOLD action with a target price of SGD$9.50.
[All calculations made in this article are based on sum-of-the-parts (SOTP) valuation.]
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but Fides Assets makes no representation and accepts no responsibility or liability as to its completeness or accuracy.