Brokers' take

Compiled by Kenneth Lim, The Business Times

SINGAPORE AIRLINES | HOLD

TARGET PRICE: $10.10
DEC 21 CLOSE: $9.75
UOB Kay Hian, Dec 16

Parent Singapore Airlines' (SIA) load factor decline accelerated in the peak season. Its passenger loads fell 1.9 percentage points (versus a 1.6 percentage point decline in October) on the back of a decline in passenger traffic.

At 76.9 per cent, SIA's loads were the lowest in eight months. With the exception of Tigerair, which registered flat loads, passenger load factors declined across all subsidiaries.

The continued weakness in loads in the peak travel period does not bode well for peak Q3 earnings expectations. Year-to-date, eight-month FY17 stood at 77.9 per cent, in line with our full year estimate of 78 per cent.

SIA Cargo's loads also did not improve as cargo traffic growth slowed to a mere 3.4 per cent from October's 10 per cent growth. Aside for East Asia, cargo loads declined across all other regions. We reckon cargo yields will likely remain weak.

Passenger loads to South-west Pacific fell 8 percentage points, highlighting the risk to SIA's traffic on the Kangaroo route.

SIA attributed the decline to "material increases in industry capacity". We reckon this was due to capacity additions by the Big Three Chinese carriers, where seat capacities to Australia have risen by 12 per cent this month thus far. This will likely be exacerbated by the recent open skies agreement between China and Australia.

About 19 per cent of SIA's capacity in km-terms is directed towards Australia, and we believe SIA's loads on this sector will likely continue to fall.

Rising fuel prices could lead to higher into-plane fuel costs, offset by lower fuel hedging losses.

Since end-August, jet fuel prices have risen 15 per cent to US$65/barrel. Our full-year estimate implies into-plane jet fuel cost of US$65/barrel in H2 FY17.

Should fuel prices rise further, this will result in higher into-plane fuel costs, partly offset by lower fuel hedging losses or possibly even fuel hedging gains.

As at Q2 FY17, SIA had hedged 29 per cent of its H2 FY17 jet fuel requirements at US$68/barrel and 3 per cent at US$63 on Brent.

Maintain "hold" and target price of $10.10. We continue to value SIA at 0.7 times FY17 forecast core book value ex-SIA Engineering Co, or one standard deviation below mean price-to-book value. Suggested entry price is $8.90.

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