SINGAPORE (Jan 3): After an uninspiring 2017, Singapore Airlines (SIA) is expected to take to the skies in 2018.
Singapore’s flag carrier underperformed the benchmark Straits Times Index (STI) by 7 percentage points last year, amid persistent concerns over weak passenger yields due to rising competition.
“However, capacity growth is expected to abate in 2018, and with that, yields should improve,” says UOB Kay Hian analyst K Ajith in a report on Wednesday.
According to estimates by the International Air Transport Association (IATA), carriers in Asia Pacific are forecast to see capacity growth of 6.8% in 2018, down from capacity growth of 9.3% in 2017.
“This will be conducive to pax yield growth,” Ajith says. “Already there are signs of stronger pax yield growth among Asia Pacific carriers, with several North Asian carriers registering greater than 5% pax yield growth in 4Q17.”
Amid this favourable yield environment, the analyst expects SIA’s pax yield to rise by 2.7% in 2HFY18, and improve by a further 1.6% in FY19.
“This, coupled with a significant recovery in cargo earnings, mandates a re-rating,” Ajith adds. “Rising pharmaceutical exports, higher e-commerce transactions and strong Asia Pacific to North American rates are underpinning the improving profitability.”
As such, UOB is upgrading SIA to “buy” and raising its target price to $11.90, from its previous “hold” call with a fair value of $11.10.
Meanwhile, Ajith opines that SIA could see a strong 3Q on the back of improvements in passenger load factor, which would drive operating profit.
In November 2017, SIA’s passenger load factor rose 3.1 percentage points year-on-year – the highest increase in five months.
“In 2QFY18, SIA’s pax load factors improved by 1.7ppt y-o-y, leading to a 115% increase in parent airline’s operating profit. In comparison, October’s and November’s load factor rose by 3ppt y-o-y and thus parent airline’s 3Q operating profit could potentially register similar growth,” Ajith says.
In addition, Ajith notes that for the past two years, operating profits in 3Q for the parent airline has been almost double that of 2Q operating profits.
“We believe the street is still sceptical of earnings growth, despite numerous indications of a recovery in air cargo rates and earnings. We expect the street to eventually re-rate SIA as 3Q earnings surprise,” says Ajith.
“All in all, we expect SIA’s core net profit to double to $627 million in FY18 and rise by a further 15% in FY19 to $724 million,” he adds.
As at 2.38pm, shares of SIA are trading 2 cents higher at $10.69, implying an estimated price-to-earnings ratio of 20.1 times and a dividend yield of 2.5% in FY18.
