Excerpts from analyst's report


paulyong_dbsDBS Vickers analyst: Paul Yong, CFA (left)

·
 Consuming > 48m barrels of jet fuel per year, SIA should see substantial cost savings from lower fuel prices, though this will be initially dampened by a stronger US$ and fuel hedges in place

·  Lift FY16F earnings by 30% and introduce FY17 estimates; expecting SIA’s ROE to rebound strongly to 7.3% in FY16 and 9% in FY17

·  Higher dividends for FY16 are likely given improved profit outlook and strong balance sheet

·  Upgrade to BUY with S$12.90 TP (1.1x FY16 P/BV) 


Relief from lower jet fuel price.
SIA Group (including Tigerair), is projected to consume over 48m barrels of jet fuel per year. With jet fuel currently at US$75 per barrel versus nearly US$120 per barrel just in August, the group will reap substantial benefits from lower fuel costs.

at_changiSIA could pay higher dividends for FY2016 (ending March 2016). NextInsight file photoHowever, the upside will not be immediately apparent given that the US$ has strengthened by about 6% against the S$ since August and that SIA has hedged over 60% of its fuel requirements until March 2015 at c. US$116/bbl.
 
FY16F earnings lifted by 30%. We now assume jet fuel price to average US$95/bbl in FY16 vs US$125/bbl previously, but cost savings would be partially offset by stronger USD/SGD rate and lower yield assumptions. If jet fuel prices remain persistently well below US$95/bbl, most of the cost savings could likely to be passed on to consumers in the form of lower ticket prices.
 
Meanwhile, the Group’s balance sheet is projected to remainvery strong with a net cash position of c. S$4bn.
 
Expect higher dividends on improved earnings outlook. We project SIA to pay out at least 50Scts in dividends for FYE Mar ’16, given the improved profit outlook and its strong balance sheet position. This equates to c. 60% payout and translates to a decent dividend yield of 4.3%.

Recent story: SIA: No Joy Yet From Falling Oil Prices 



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