FUEL SAVINGS TO OFFSET MERS CONCERNS
- Maintain BUY;
- MERS concerns are overblown whilst lower fuel costs will provide concrete boosts to SIA’s bottom line
- SIA has underperformed (-12%) the STI (-5%) over the last 8 weeks, due to concerns over the impact of MERS, which are overblown, in our view.
- We maintain our BUY call on SIA with 23% upside to our target price of S$12.80, as earnings improve on lower fuel costs, particularly from 2QFYMar16 onwards.
- Fuel cost savings to be more substantial from 2H CY15 onwards, which should drive better earnings recovery
- SIA has hedged 58.5% of its fuel requirements for the current quarter at US$110/bbl, and c. 45% of its fuel requirements for the full year at less than US$106 per barrel, implying that fuel cost savings will be more substantial for SIA from 2Q onwards.
- We project SIA’s earnings to more than double to S$763m in FY16F and grow further to S$1,105m in FY17F.
- Earnings risk is on the upside if jet fuel stays below US$90/bbl for a sustained period
- We have assumed an average jet fuel price of US$90 per barrel for SIA in FY16 and FY17, compared to the current price of c. US$75/bbl. If fuel prices do not move up further for a sustained period, there should be further upside to our earnings estimates. Each US$1 savings on average jet fuel price boosts SIA’s earnings, ceteris paribus, by S$50m per annum.
Valuation:
- Re-rating towards our TP of S$12.80 as earnings improve.
- Our S$12.80 target price is based on 1.1x FY16 P/BV, which is its historical mean and reflects SIA’s improved earnings outlook. With net cash of c. S$3.40 per share, we see current valuation of 0.9x FY16 P/BV as an attractive entry level for investors.
Key Risks to Our View:
- Vulnerable to demand shocks and fuel price increase SIA is susceptible to demand shocks such as economic outlook or pandemics e.g. if the MERS situation hits Singapore like SARS did back in 2003.
- However, share price did rebounded quickly even during SARS once the situation was under control. Fuel costs account for over a third of SIA’s operating costs and should oil prices spike sharply, it would impact on earnings.
Source: DBS Group Research
