OCBC Investment Research analysts: Eugene Chua & Carey Wong
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Positive impact negated by several factors
While lower oil prices should improve SIA’s profitability significantly, we believe there are several factors at work that negate partly the positive impact:
1) SIA has always hedged large proportion of each year’s jet fuel needs ahead and the resultant hedging losses offset savings from lower jet fuel costs,
2) yields are likely to be depressed due to overcapacity issues as we continue to see large deliveries of new aircraft due in 2015 for Asia Pacific region,
3) SIA is likely to pass on the savings to consumers through lower fuel surcharges in order to remain competitive in the region, and lastly
4) SIA will record in its books a larger share (from 40% to 55%) of Tigerair’s expected losses for the next few quarters.
1) SIA has always hedged large proportion of each year’s jet fuel needs ahead and the resultant hedging losses offset savings from lower jet fuel costs,
2) yields are likely to be depressed due to overcapacity issues as we continue to see large deliveries of new aircraft due in 2015 for Asia Pacific region,
3) SIA is likely to pass on the savings to consumers through lower fuel surcharges in order to remain competitive in the region, and lastly
4) SIA will record in its books a larger share (from 40% to 55%) of Tigerair’s expected losses for the next few quarters.
Increase FV; maintain HOLD
Factoring in the new jet fuel cost assumption and other factors, our FY16 PATMI forecast increases by ~19% to S$524.6m. Consequently, rolling forward our valuations to 0.95x FY16 P/B (0.5 SD below 5-year historical average), we increase our fair value estimate from S$10.12 to S$10.80. Maintain HOLD.
