Singapore Airlines (SIA) is set to announce its 2QFY20 results after market hours today. Here is what to expect.
Passenger business
SIA’s passenger business is expected to remain relatively robust. According to a UOB brokerage report on 17 October, the analyst is expecting operating improvement on both a YoY and QoQ basis for the airline.
This is driven mainly by its core passenger business, where passenger load factor (PLF) in 2QFY20 has seen a broad-based improvement across its key parent airline as well as Scoot.
Parent’s airline PLF of 85.9% was a 0.7% improvement YoY and its September PLF was the highest in over a decade (for the month of September) and UOB attributed this to possible diversionary gain from traffic out of Hong Kong.
According to a recent South China Morning Post report dated 1 November, it was highlighted that SIA registered “single-digit” growth in outbound travel from Hong Kong. This suggest that SIA is picking up business from struggling rivals like Cathay Pacific Airways.
However, the increased in outbound flight only partially offset the decline in inbound flight, with SIA’s general manager for Hong Kong and Macau, Mr Chia Chow Hwee noting that the overall decline is down 10 ppt on average.
Operating profit could improve
According to UOB, SIA’s operating profit could show an improvement on the back of strong PLF for its Parent airline, SilkAir and Scoot. This is based on the assumption that passenger yield is stable.
Its Parent airline’s passenger yield has demonstrated resilience over the past 2-3 quarters with a stem in downward trend. In fact, its yield registered an encouraging 3.9% growth on a constant currency basis in 1QFY20, according to CIMB’s post-1QFY20 report.
For 2QFY20, key currencies such as AUD, Euro, GBP remains weak against SGD but INR and IDR have seen some strengthening. Hence, there is a slight possibility that passenger yield for its parent airline might actually surprise positively in 2QFY20, rising by more than 1% YoY. We believe that could count as a key positive if it does materialize.
Both Scoot and SilkAir are expected to register operating losses, although the magnitude of the losses is likely to decline QoQ/YoY based on stronger PLF.
Cargo weakness remains key issue
SIA’s cargo traffic declined 8.5% YoY in 2QFY20, leading to a 5.3ppt YoY deterioration in load factor. The load factor decline in 2QFY20 was worst than the 2.7% decline seen for 1QFY20, where cargo yields also declined by 4.2% YoY. A worsening of cargo yields could result in larger-than-expected drag from its cargo segment.
Associates to remain in losses
SIA’s key associates, Vistara and Virgin Australia are expected to remain loss-making. According to UOB, SIA recapitalized Virgin Australia in 1QFY20 and thus is likely to recognize any incremental losses. Vistara (49% owned by SIA) which commenced international operations in August, could similarly be in the red.
Lower fuel cost could help operating profits
UOB also noted that the average fuel jet price for 2QFY20 was about 4% lower QoQ and thus suggest a QoQ improvement in operating profit is highly likely. Note that SIA reported an operating profit of S$233m in 2QFY19 and S$200m in 1QFY20.
Parent airline and SIAEC remain only bright spots for now.
While operating profit could surpass 1QFY20 level (QoQ), we believe it might be relatively flat/slight positive on a YoY basis. Stronger operating profile of its parent airline is likely to be offset by continued operating losses seen in SilkAir, Scoot and Cargo.
SIA Engineering (SIAEC)’s stronger-than-expected performance in 2QFY20 could provide some support for the Group’s overall operating performance.
Valuations undemanding but no strong catalysts ahead
Most in the street are having a NEUTRAL view on SIA. The counter is currently trading at c.20% discount to its book value and seems to be undervalued based on that metric.
However, the street note that earnings momentum for SIA looks set to decelerate, given the ongoing cargo demand and yield weakness.
The current mayhem in Hong Kong is also a slight negative to SIA, with the airline looking to reduce its capacity.
Look out for SIA’s results after market closes today. While we expect its parent airline to continue showing operating improvement, particularly in terms of yield, this will likely be offset by its cargo business. The uncertainty surrounding the latter, coupled with operational issues for SilkAir pertaining to the grounding of its six 737 Max 8 planes will continue to cast a shadow on SIA’s Group overall performance in the coming quarters.
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Disclosure: The accuracy of material found in this article cannot be guaranteed. Past performance is not an assurance of future results. This article is not to be construed as a recommendation to Buy or Sell any shares or derivative products and is solely for reference only.
