Fair value: S$11
28 July 2017, Singapore – Singapore Airlines (SIA:SP) reported a net profit of S$235m for 1QFY18 (April-June 2017), down 9% y/y. However, stripping out one-off items, Singapore Airlines’ core profit actually improved markedly. Here are our key takeaways:
- What first caught our eye was the much higher sales in advance of carriage at the end of June 2017: Singapore Airlines (SIA:SP)’s sales in advance of carriage surged 22% y/y and 18% q/q. This is positive and suggests stronger traffic and revenue growth in the months ahead.
- Core profitability improved y/y and q/q; operating profit margin rose 1ppt y/y to 3% if we strip out the one-offs. SIA’s 1Q results in this and the last financial year were significantly skewed by sizeable one-off items which include revenue adjustments related to SIA’s Krisflyer programme this year, the upfront revenue recognition for unutilised tickets last year, higher amount of compensation for changes in aircraft delivery slots, gains related to SIA Engineering’s divestment of HAESL and higher staff profit-sharing bonuses last year. Excluding these one-off items, SIA would have earned a recurring profit of S$62m in 1QFY18, a marked improvement from its S$55m loss a year ago and S$32m profit in 4QFY17 based on our estimates.
- Premium passenger airline business returns to profitability with S$241m operating profit after a disappointing S$41m operating loss in 4QFY17 and was 22% higher y/y. Passenger yield decline moderated, down 2% y/y versus the 5% y/y decline in 4QFY17 which is encouraging.
- SilkAir’s profitability weakened significantly. Its passenger yield decline worsened to 9% y/y versus its 5% y/y decline in 4QFY17. SilkAir’s operating profit shrank significantly by 74% y/y to S$7m which is disappointing, reflecting stiff competition on regional routes.
- Budget Aviation Holdings BAH’s (Scoot + Tigerair) passenger yield decline moderated to 2% y/y in 1QFY18 from 8% y/y in 4QFY17. However, it booked lower operating profits (down 67% y/y) due to higher unit cost (+2% y/y). We expect BAH’s yield to decline further as it steps up its expansion to new destinations (such as Honolulu) and long-haul routes have lower yields due to their longer stage length.
- SIA Cargo’s profitability improved significantly. SIA Cargo’s yields surged 5% y/y in 1QFY18, much better than its 3% y/y decline in 4QFY17, and 11% decline in full year FY17. This helped SIA Cargo turn around with an operating profit of S$6m vs S$5m loss in 4QFY17 and S$34m loss a year ago. This is a positive read-through for the upcoming financial results of airlines with greater cargo revenue exposure including Cathay Pacific (293:HK), China Airlines (2610:TT), EVA Airways (2618:TT) and Korean Air (003490:KS).
- SIA Group is well-hedged at 41.9% for 2QFY18 fuel consumption at an average jet fuel price of US$63/bbl. SIA also has longer-dated Brent hedges with maturities extending to FY22-FY23 covering up to 47% of the Group’s projected annual fuel consumption at US$53/bbl to US$59/bbl. These are favourable hedge prices – not too far from the current spot jet kerosene and Brent crude oil price of US$60/bbl and US$52/bbl.
- Our key concern is that SIA parent airline’s unit cost rose 4% y/y in 1QFY18 versus BAH and SIA Cargo’s 2% increase and SilkAir’s 1% reduction. This was mainly driven by higher fuel, landing, parking and handling charges. We look forward to learning more about SIA’s concrete Transformation Plans and how management plans to improve its cost competitiveness without compromising its premium service offering and staff morale.
- Heading towards a small net debt position soon. Capex surged 60% y/y to S$1.8m, widening the negative free cash flow to S$1.1B versus its positive free cash flow of S$87m a year ago. Consequently, SIA’s net cash balance has shrunk to only S$339m from S$1.5B at the end of March 2017. SIA’s net cash balance will shrink further following its final dividend payment of S$0.11 per share on 16th August 2017. This is in line with our expectations that SIA is likely to go into a net debt position in the current financial year as its fleet expansion plan accelerates compared to recent years. We forecast a net debt-equity of 0.05x, still a significantly healthier balance sheet compared to its global airline sector peers which have an average net debt-equity level of 1.1x.
Chart: Singapore Airlines 1QFY18 Results at a Glance
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