Event
SIA posted dismal 1QFY Mar12 net earnings of just $44.7m, down 82% from a year ago. Earnings were decimated by higher fuel costs, which increased by over $300m alone versus the previous year. This is also despite the fact that revenues remained strong, up 3% YoY to $3.6b. We are reducing our forecasts substantially, but maintain our HOLD rating and target price of $14.40 in view of SIA’s robust balance sheet.
Our View
Passenger yields saw some moderation to 11.8cts/pkm from 12.1 cts/pkm in the previous quarter, but remained relatively firm. We also estimate that cargo saw flat revenue from weaker yields despite increasing its loads.
On the cost side, the variance in fuel costs implies that the airline has not pursued a more aggressive hedging policy. SIA only achieved some $12m in hedging gains for the quarter. We are raising our assumption for average cost of fuel from US$120/barrel to US$130/barrel, which implies minimal hedging, and for oil prices to stay at current levels for the next nine months. All other costs were kept broadly in check.
Going forward, we expect some improvement in yields, as SIA has so far resisted raising ticket prices and fuel surcharges further. We believe that this will be inevitable, and the firm loads suggest that the market will be able to bear this.
We slash our forecasts by 45% for FY Mar12 to $798.0m and by 18% for FY Mar13 to $1,100.7m. This reduction is solely due to the higher fuel cost assumption and partially offset by higher yield assumptions.
Action & Recommendation
We maintain our fundamental HOLD rating on the stock, based on a P/B of 1.2x. While earnings in the short term are at risk, SIA’s balance sheet will enable it to weather the storm, as it has several times before. Reminder: book closure for SIA’s bumper $1.20 final and special dividend is next Thursday.
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