Singapore Airlines (SIA SP) Beats Consensus for FY18. Current Year Will Be Tougher.

Singapore Airlines (SIA SP) - Upcoming Results. Sitting Pretty but Possible Cash Call.

Singapore Airlines Q2 Results - Parent Better but Minimal Improvement Overall. Dividend +11%

Corporate Credit Analyst

Alan Greene

Equity Bottom-Up

Singapore Airlines (SIA SP) announces results for the full year ended 31 March 2019 tomorrow, after market close. The results are likely to be poor and with unrelenting gloom for the next 18-24 months.The basic equation is that SIA continues to generate annual cash from operations of around SGD2.4bn to SGD2.9bn out of which it is funding an annual fleet capex programme through to end of FY22 of SGD5.0bn or more. Unsurprisingly SIA is borrowing heavily, relying on lenders’ perception of its credit strength afforded by Temasek’s 55.6% interest In SIA.The dividend was cut at the interim stage to 8 cents from 10 cents and the final too is likely to be lower than last year’s 30 cents, possibly as low as 12 cents. Having declared dividends of 20 cents/share in FY17, a rush of blood saw it increase to 40 cents in FY18 but FY19 could well see it return to 20 cents/share, for a cash cost of SGD236 million.After a brief respite in fuel prices in December, simmering geo-political tensions coupled with increasing demand have seen jet fuel prices rise, returning to the low USD80s/barrel since FYE19. Overall, the average jet fuel spot price for FY19 was about 1% higher than FY18 while the average USD/SGD rate of 1.36 was broadly unchanged.SIA’s passenger load factors continued to improve in FY19 but the rate of improvement is slowing. FY19 was the first full year since SIA overhauled its fare structure and rewards programme. The new system has probably helped it to improve the load factor even as capacity has unavoidably increased with the fleet renewal programme. With a rising proportion of premium seating in its fleet, SIA parent yields should be rising. However, competition continues to squeeze economy cabin yields. Overall yields are unlikely to have recovered and with any improvement swamped by cost increases.Elsewhere, cargo has had another soft year in FY19. Scoot has been growing capacity but not its profits. Meanwhile, Silk Air, which found itself in a shrinking niche market, is in the process of being integrated into SIA and Scoot.At a share price of SGD9.39, already down 12 cents in two days, compared with a NAV of SGD10.36 at 31 December 2018, there could still be value in the stock. However, the substantial fuel hedges, which aim to protect operating profit, lead to significant volatility in comprehensive income when marked to market, potentially obliterating NAV gains from retained profits.With no near-term prospect of (post-capex) free cash flow or sustainable earnings growth, the dividend might be stuck at 20 cents for a near 2% yield, on a share price trading in a narrow range. For now, the 3.03% coupon offered on its recent bond issue looks like the best returns from an investment in SIA.

Singapore Airlines (SIA SP) announces results for the full year ended 31 March 2019 tomorrow, after market close. The results are likely to be poor and with unrelenting gloom for the next 18-24 months.The basic equation is that SIA continues to generate annual cash from operations of around SGD2.4bn to SGD2.9bn out of which it is funding an annual fleet capex programme through to end of FY22 of SGD5.0bn or more. Unsurprisingly SIA is borrowing heavily, relying on lenders’ perception of its credit strength afforded by Temasek’s 55.6% interest In SIA.The dividend was cut at the interim stage to 8 cents from 10 cents and the final too is likely to be lower than last year’s 30 cents, possibly as low as 12 cents. Having declared dividends of 20 cents/share in FY17, a rush of blood saw it increase to 40 cents in FY18 but FY19 could well see it return to 20 cents/share, for a cash cost of SGD236 million.After a brief respite in fuel prices in December, simmering geo-political tensions coupled with increasing demand have seen jet fuel prices rise, returning to the low USD80s/barrel since FYE19. Overall, the average jet fuel spot price for FY19 was about 1% higher than FY18 while the average USD/SGD rate of 1.36 was broadly unchanged.SIA’s passenger load factors continued to improve in FY19 but the rate of improvement is slowing. FY19 was the first full year since SIA overhauled its fare structure and rewards programme. The new system has probably helped it to improve the load factor even as capacity has unavoidably increased with the fleet renewal programme. With a rising proportion of premium seating in its fleet, SIA parent yields should be rising. However, competition continues to squeeze economy cabin yields. Overall yields are unlikely to have recovered and with any improvement swamped by cost increases.Elsewhere, cargo has had another soft year in FY19. Scoot has been growing capacity but not its profits. Meanwhile, Silk Air, which found itself in a shrinking niche market, is in the process of being integrated into SIA and Scoot.At a share price of SGD9.39, already down 12 cents in two days, compared with a NAV of SGD10.36 at 31 December 2018, there could still be value in the stock. However, the substantial fuel hedges, which aim to protect operating profit, lead to significant volatility in comprehensive income when marked to market, potentially obliterating NAV gains from retained profits.With no near-term prospect of (post-capex) free cash flow or sustainable earnings growth, the dividend might be stuck at 20 cents for a near 2% yield, on a share price trading in a narrow range. For now, the 3.03% coupon offered on its recent bond issue looks like the best returns from an investment in SIA.

Singapore Airlines (SIA:SP) (C6L)– Uncomfortable Rate of Descent to Continue