SINGAPORE
Update
Results
SINGAPORE Company
Company
Report
MITA
MITANo.
No. 010/06/2009
022/06/2011
28 September 2011
Singapore Airlines Limited
Initiating Coverage
BUY
Initiate with BUY - Catch a safe flight
Current Price:
Fair Value:
S$11.40
S$12.59
STI
3500
16.5
14.5
12.5
10.5
8.5
6.5
4.5
2.5
0.5
3000
2500
SIA
2000
1500
Reuters Code
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
1000
SIAL.SI
ISIN Code
C6L
Bloomberg Code
SIA SP
Issued Capital (m)
1,180
Mkt Cap (S$m / US$m)
13,543 / 10,556
Major Shareholders
Temasek Holdings
55.3%
Free Float (%)
43.7%
Daily Vol 3-mth (‘000)
3,106
52 Wk Range
(S$m)
10.300 - 15.608
FY10
FY11
FY12F
FY13F
Revenue
12,707.3
14,524.8
14,835.4
15,476.6
EBITDA
1,795.0
3,080.7
2,134.6
2,362.3
EPS (S¢)
18.0
90.4
40.6
57.8
P/E (x)
62.6
12.5
27.6
19.0
P/NTA (x)
1.0
1.0
1.1
1.0
Research Team
(65) 6531 9800
e-mail: info@ocbc-research.com
Cutthroat competition has intensified. Positioned as a
premium airline, SIA has always faced tough competition in
the aviation industry. Middle Eastern carriers, such as
Emirates, Qatar Airways and Etihad Airways, are now
competing head-on with SIA in premium air travel. Yet despite
SIA’s status as a premium airline, it is also susceptible to the
competition from rapidly growing low-cost carriers (LCCs)
around the region. To top it all, Qantas is now planning a new
Asia-based full-service carrier. Qantas is deciding between
Kuala Lumpur and Singapore as the new carrier’s base. If
Singapore is chosen as the base for this new airline, SIA will
face new competition in its core segment at its backyard.
Competition is not new to SIA. SIA has faced competition
from global legacy airlines, LCCs and Middle Eastern carriers
for years and it has emerged relatively unscathed. For example,
despite the presence of competition the Group in FY11 made
earnings of S$0.90 per share, up more than 400% from the
crisis-hit FY10. Looking back further, FY11 net earnings was
also 2.9% higher than in FY09. In addition, SIA has successfully
maintained its standing as a premium carrier and has probably
the strongest balance sheet among airlines to weather
downturns.
Potential growth from new wholly-owned LCC. SIA has
not experienced much growth over the last few years. This is
most evident by a falling capital expenditure as a percentage
of sales and a rising dividend payout ratio. SIA is currently
planning the launch of a wholly-owned subsidiary LCC in May
2012. The new carrier will be operated independently and
managed separately from the flagship Singapore Airlines and
it will operate medium-to-long haul flights. This new venture
could provide the group its next leg of growth, if cannibalisation
effects can be minimised. With Singapore-based LCCs mostly
focused on short-to-medium haul flights to regional destinations,
SIA could potentially develop a new business segment with its
new LCC.
Initiate with a BUY. SIA’s share price has fallen 27% from
this year’s peak in Jan 2011, along with the rest of the aviation
sector. While the threat of recession is very real, the market
seems overly eager to price a recession into SIA’s share price.
Instead, we believe that a fairer approach is to use an adjusted
ex-net cash P/B multiple of 1.01x, or one standard deviation
below historical average, to derive a fair value of S$12.59 per
share, representing an upside of 10.5%. And we initiate
coverage on SIA with a BUY.
Please refer to the important disclosures at the back of this document.
Singapore Airlines Ltd
Table of contents
Page
Section A
Company background
3
Section B
Industry outlook
6
Section C
SWOT analysis
11
Section D
Financial highlights and analysis
19
Section E
Valuation and recommendations
26
Section F
Disclaimer
30
Page 2
28 September 2011
Singapore Airlines Ltd
Section A: Company background
SIA Group
The Singapore government’s investment and holding company Temasek
Holdings holds a majority stake of 55.3% in the Singapore Airlines Limited
Group (SIA)1. The SIA Group has four core business segments:
1.
2.
3.
4.
Singapore Airlines – its flagship passenger airline and core business,
SIA Cargo – its wholly-owned cargo subsidiary,
SilkAir – its wholly-owned regional airline subsidiary, and
SIA Engineering – its 79.3%-owned engineering subsidiary
Singapore Airlines
Singapore Airlines is SIA’s flagship passenger carrier and the national carrier
of Singapore. Singapore Airlines prides itself as the airline industry’s
pacesetter and lays claims to the following firsts:
·
·
·
·
·
·
1970s – First to offer free headsets, choice of meals and free drinks in
economy class
1991 – First to introduce satellite-based in-flight telephones
1998 – First to involve world-renowned chefs in developing in-flight meals
2001 – First to offer audio and video on demand via KrisWorld in all seat
classes
2004 – First to operate the world’s longest non-stop commercial flight
between Singapore and Los Angeles in Feb 2004 on the A340-500, and
surpassing the record with the non-stop service to Newark in Jun 2004
2007 – First to fly the A380-800 from Singapore to Sydney on 25 Oct
2007
Branding
Singapore Airlines’ branding and publicity efforts used to primarily revolve
around its female flight attendants known as Singapore Girls. Dressed in a
distinctive version of the Malay sarong kebaya, the Singapore Girl is portrayed
as the epitome of Singaporean hospitality and elegance. The brand was
further strengthened by Singapore Airlines winning countless awards from
various travel magazines, trade publications and tourism agencies over the
years for its hospitality and cabin service.
From this point on, we refer the Singapore Airlines Group as SIA and its flagship
Singapore Airlines will be named in full.
1
Page 3
28 September 2011
Singapore Airlines Ltd
Although industry awards are usually subjective, Skytrax’s The World Airline
Awards™ are commonly recognised as a good benchmarking tool for
passenger satisfaction levels of airlines across the world. Exhibit 1 gives a
sense of how favourably Singapore Airlines ranks versus its global peers
over the years.
Exhibit 1: Skytrax’s The World Airline Awards™ – Airline of the year
Second
Third
Year First
Singapore Airlines
Cathay Pacific
2001 Emirates
Cathay Pacific
Singapore Airlines
2002 Emirates
Singapore Airlines
Emirates
2003 Cathay Pacific
Emirates
Cathay Pacific
2004 Singapore Airlines
Qantas
Emirates
2005 Cathay Pacific
Qantas
Cathay Pacific
2006 British Airways
Thai Airways
Cathay Pacific
2007 Singapore Airlines
Cathay Pacific
Qantas
2008 Singapore Airlines
Singapore Airlines
Asiana Airlines
2009 Cathay Pacific
Singapore Airlines
Qatar Airways
2010 Asiana Airlines
Singapore Airlines
Asiana Airlines
2011 Qatar Airways
Source: Skytrax
Fleet
Singapore Airlines has a fleet of 107 aircraft. The fleet has an average age of
six years and five months, making it one of the world’s youngest and most
fuel efficient fleet.
Exhibit 2: The Singapore Airlines Fleet
On order
15
20
6
-
Options
20
B747-400
Aircrafts
19
5
11
2
4
B777-200
26
-
-
B777-200ER
9
7
5
19
107
8
20
69
20
46
A330-300
A340-500
A350-900
A380-800
B777-300
B777-300ER
B787-9
TOTAL
6
-
Suites
12
12
-
First
12
12
-
8
18
8
-
Seats
Business
30
100
60
86
50
42
30
30
50
49
42
-
Economy
255
399
311
313
234
293
255
226
265
228
-
Total
285
100
471
409
375
288
323
285
284
332
278
-
Source: SIA
And renewal of its fleet is an ongoing process. SIA CEO said it is awaiting
details of enhancements to Boeing’s 777-300ER and Airbus’ A350-1000
planes, before deciding which model to order. However, Singapore Airlines
did not reveal how many of these planes it is planning to order.
Page 4
28 September 2011
Singapore Airlines Ltd
SilkAir
SIA set up a regional carrier Tradewinds in 1989, serving regional holiday
destinations such as Pattaya, Phuket, Hatyai, Kuantan and Tioman.
Regional business destinations such as Jakarta, Phnom Penh and Yangon
were later added. In 1992, Tradewinds was renamed SilkAir and the carrier
evolved from a holiday destination airline to a regional carrier.
SilkAir positions itself as a full-service short-to-medium haul regional carrier.
Not to be confused for a low-cost carrier, SilkAir serves in-flight food and
beverages and provides some in-flight entertainment. SilkAir now serves the
up-and-coming second- and third-tier cities around the region. With SilkAir
acting as the regional feeder service for Singapore Airlines, this strategy
has better integrated the two airlines and created more cross-selling
opportunities.
Fleet
With an average age of 5.8 years, SilkAir has a fleet of aircraft that is even
younger than that of Singapore Airlines. It currently operates eighteen aircraft,
12 Airbus A320-200 and six Airbus A319-100 aircrafts.
Exhibit 3: The SilkAir Fleet
A320-200
A319-100
Aircrafts
5
1
6
1
2
3
Business
16
12
12
12
8
8
Seats
Economy
126
132
138
106
112
120
Total
142
144
150
118
120
128
Source: SIA
SIA Cargo
SIA has a dedicated cargo division formed since 1992. With 12 freighter
planes and the belly-hold cargo capacity of Singapore Airlines’ planes, SIA
Cargo flies more than 600 flights a week to over 72 cities across 36 countries.
In 2010, SIA Cargo ranks sixth in the world in terms of international freight
tonne-kilometre.
SIA Engineering
Together with its 25 joint ventures and subsidiaries across nine countries,
SIA Engineering Company (SIAEC) provides maintenance, repair and overhaul
(MRO) of aircraft to more than 80 international airlines worldwide. In addition
to SIAEC’s six hangars and 22 in-house workshops in Singapore, it provides
line maintenance to airlines at airports in Australia, United States, Hong
Kong, Indonesia, Philippines and Vietnam.
Page 5
28 September 2011
Singapore Airlines Ltd
Section B: Industry outlook
Demand
Based on International Air Transport Association’s (IATA) figures illustrated
in Exhibit 4, global air travel, depicted by revenue-passenger-kilometres
(RPK), has trended up in CY11. This includes a 5.9% YoY growth in Jul
2011. However, it is important to take note that world trade, business and
consumer confidence have slumped as a result of the debt problems in
Europe and the lack of economic growth in the US. Thus, air travel demand
seems uncertain going forward.
Exhibit 4: Global air travel (RPK) and air freight volumes (FTK)
Source: IATA
From Exhibit 5, IATA’s collated numbers showed that Asia Pacific airlines’
international passenger traffic has continued to grow, albeit slower than global
growth. Year to Jul 11, global air passenger numbers grew 6% but air
passengers in the Far East were up only 3%. The relative weakness in
Asian air travel can be partly attributed to the adverse impact of Japan’s
earthquake in Mar 2011. Air travel and freight volumes in Asia should see a
boost as the reconstruction in Japan continues and the electronics and auto
industries’ supply chains are restored.
Exhibit 5: Asia Pacific airlines - International passenger traffic (RPKs)
Source: IATA
Page 6
28 September 2011
Singapore Airlines Ltd
Exhibit 4 also shows that global air freight volumes, represented by freighttonne-kilometres (FTK), have gone flat in CY11. This is after a considerable
fall in air freight volumes in 2HCY10. IATA said air freight lost market share
in late CY10 but the stagnation we saw in recent months was because
world trade has stopped expanding. Exhibit 6 illustrates Asia Pacific airlines’
international freight traffic has trended down in CY11.
Exhibit 6: Asia Pacific airlines - International freight traffic (FTKs)
Source: IATA
Singapore Airlines has a bigger exposure to premium air travel (first and
business class seats) than most other airlines. Exhibit 7 illustrates the
strong growth of premium air travel in CY11. For example, air passengers
travelling on premium seats grew 6.4% and 7.5% YoY in Jun and Jul 2011
respectively. However, premium travel is still 6% below its peak before the
2009 global financial crisis while economy travel has risen 6% more than its
pre-crisis high point.
IATA added that premium travel in Jul 2011 saw the strongest growth in Asia
(Far East) and South American markets, both recording double-digit growth.
Exhibit 7: International air passengers by seat class
Source: IATA
Page 7
28 September 2011
Singapore Airlines Ltd
The global economic uncertainty has not yet affected premium air travel.
But world trade has stopped growing and the business confidence index
has fallen to below 50. (Refer to Exhibits 8 and 9) These two indicators have
diverged from the growth in premium air travel. IATA attributed the divergence
to the time lag in business travel decisions, since decisions to travel in JunJul 2011 were probably made earlier in the year when trade and confidence
was going strong. Given the divergence, IATA is expecting a slowdown in
premium air travel in 4QCY11.
Exhibit 8: Premium passengers YoY growth and world trade growth
Source: IATA, CPB Netherlands
Exhibit 9: Premium passengers YoY growth and business confidence
index
Source: IATA, PMI
Page 8
28 September 2011
Singapore Airlines Ltd
Capacity
Despite air travel and freight demand uncertainties, global air passenger
and freight capacities continue to grow. Comparing Exhibits 10 and 11, we
see that the expansion in air passenger capacity over the past year has
been close to the growth in air travel demand. But air freight capacity has
continued expanding even though air freight demand has stagnated. This is
primarily due to increased belly-hold cargo capacity in passenger planes as
air passenger capacity grows.
Exhibit 10: Passenger (ASK) and freight (AFTK) capacities
Source: IATA
Load factors
Global air passenger load factor suffered a decline in early 2011 but has
since recovered back to 2010 highs; while global air freight load factor has
been trending down since early 2010. However, global air freight load factor
does not look terrible if we compare it against historical numbers pre-2009
crisis.
Exhibit 11: Load factors on global air travel and freight
Source: IATA
Page 9
28 September 2011
Singapore Airlines Ltd
Fuel costs
Jet kerosene prices have fallen since reaching its recent peak in Apr 2011.
Fuel prices are trending down because of the uncertain global economic
outlook. Another thing to note is that this recent fall is accompanied by
volatile swings. Also, jet fuel prices remain ~50% higher YoY despite weaker
recent prices.
Exhibit 12: Bloomberg Singapore Jet Kerosene fob Spot Cargo Price
($/barrel)
250
200
150
100
50
0
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
US $
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
S$
Source: Bloomberg
Page 10
28 September 2011
Singapore Airlines Ltd
Section C: SWOT analysis
STRENGTHS
WEAKNESSES
• Highly regarded premium airline
•
Flagship Singapore Airlines lack growth
opportunities
•
Bigger exposure to premium segment =>
more discretionary and bigger impact in
downturn
•
Lacked nimbleness in cutting capacity during
2009 crisis
• Strong balance sheet
– High dividend
support
yield
provides
downside
– Share buyback provides downside support
– Defensive name in a volatile sector
OPPORTUNITIES
THREATS
• New LCC to better serve a new market
segment
• Growing competition from Middle Eastern
airlines
• Competition from LCCs
• Qantas new Asia-based full-service carrier
(RedQ)
• Possible recession and fuel price pressures
Strength – Highly-regarded premium airline
Singapore Airlines is arguably the world’s most highly-regarded air carrier,
with upscale service standards to match. The carrier has won countless
awards over the years and developed a reputation for its exceptional service
and reliability standards. From its iconic Singapore Girl flight attendants to
its winning of countless awards, almost everything associated with Singapore
Airlines is synonymous with excellence.
Detractors argue that most of Singapore Airlines’ strengths, be it the aircraft,
product offering or service excellence, can be replicated, or even bettered,
by rival airlines. Nevertheless, Singapore Airlines is still well regarded as
one of the world’s premier air carriers.
Strength – Strong balance sheet
A quick search on Bloomberg for SIA’s 20 closest global peers yielded
names such as Cathay Pacific, Qantas and Lufthansa. Critically, only
America’s Southwest Airlines out of these 20 global peers is in a net cash
position. At the end of 1Q12, SIA had a cash balance of S$7.9b. Even after
paying out S$1.4b in dividends in 2Q12, it will still be left with a remarkable
cash balance of S$6.5b, or a net cash position of S$4.4b.
Page 11
28 September 2011
Singapore Airlines Ltd
SIA does not have an explicit dividend policy but it has a track record of
being generous with paying out dividends to shareholders. From FY07 to
FY11, SIA paid out 59%, 58%, 45%, 66% and 153% of net earnings as
dividends to shareholders respectively. Even if we exclude the special dividend
in FY11, the payout ratio was still high at 66%, or a dividend yield of ~5%,
for that year. However, SIA is in the volatile airlines sector and its earnings
and dividends can fluctuate widely in bull and bear market conditions.
Nonetheless, SIA’s high dividend yield will provide downside support to its
share price.
In addition, SIA regularly engages in share buybacks. These share buybacks
are meant to support its employees’ share option and award programmes.
The share buybacks also provide some support to its share price. Since the
end of 1Q12, SIA has bought back 9.7m shares from the open market at a
cost of S$109.7m.
SIA has a market capitalisation of S$13.5b and a net cash balance that is
33% of its market capitalisation, making SIA a very unique airline. It is a
defensive name in the very cyclical aviation sector. If one is unsure of the
macro outlook yet wants to stay invested in the airline sector, SIA is almost
a must-own name in the portfolio. However, like a sword that cuts both
ways, while SIA’s net cash position provides good downside support to its
share price, its price usually does not climb as quickly as those of its peers
during a market recovery or bull market environment.
Page 12
28 September 2011
Singapore Airlines Ltd
Weakness – Singapore Airlines lack growth opportunities
In FY11, Singapore Airlines contributed 74% of SIA’s revenue and 66% of
operating profit, making it its most important business segment. However,
its revenues have not recovered to pre-2009 crisis levels. This is a result of
the intense competition in the aviation sector. From FY00 to FY11, SIA’s
capital expenditure as a percentage of sales has been falling and its dividend
payout ratio has been rising, even if the special dividend in FY11 was
excluded. This is a clear indication that management has struggled to find
growth opportunities in the past and decided to increase return cash to
shareholders.
Exhibit 13: Group dividend payout ratio vs. capex/sales
160%
120%
80%
40%
0%
F Y 00
F Y 01
F Y 02
F Y 03
F Y 04
F Y 05
Dividend pay out ratio
F Y 06
F Y 07
F Y 08
F Y 09
F Y 10
F Y 11
Capex /S ales
Source: SIA
Weakness – Bigger exposure to premium segment
Singapore Airlines’ market positioning in air travel has always been at the
top end of the spectrum. Consequently, it has a bigger exposure to the
premium air travel (first and business classes) than most other carriers. For
example, Singapore Airlines in Mar 2008 reconfigured its Singapore-Los
Angeles and Singapore-Newark flights from the previous 63 business class
seats and 117 economy seats to 100 business-class only configuration.
More recently, Singapore Airlines increased the business class seats on its
new A380-800s.
Premium seats cater to the jet-setting corporate and banking communities
and Asia’s increasingly affluent travellers. In good times, Singapore Airlines
derives higher profits with each premium traveller generating multiple times
more revenue than an economy traveller. In a downturn, like the one we saw
in 2009, the collapse in the more discretionary premium travel hit Singapore
Airlines especially hard. With near-term air travel demand looking increasingly
uncertain and the IATA forecasting a slowdown in premium air travel in
4QCY11, Singapore Airlines’ high exposure to premium travel may not be
such a good thing.
Page 13
28 September 2011
Singapore Airlines Ltd
Weakness – Lacked nimbleness in cutting capacity during 2009 crisis
Exhibit 14 illustrates how Singapore Airlines was aggressively increasing
passenger capacity in early FY09 while YoY load factor change (in ppt) was
negative. When air travel demand turned south in more substantial terms
due to the global financial crisis, Singapore Airlines was slow to react in
cutting capacity. With the benefit of hindsight, it expanded passenger
capacity at the wrong time and it was not nimble enough to quickly cut
capacity when the market turned sour.
Exhibit 14: Singapore Airlines YoY passenger capacity and load factor
changes
15%
0%
(1 5 % )
Ap r-0 8
Ap r-0 9
% Y oY c apac ity c hange
Ap r-1 0
Ap r-1 1
Y O Y load fac tor c hange (ppt)
Source: SIA
Since Aug 2010, Singapore Airlines has once again added capacity faster
than demand growth. The latest capacity additions have partly contributed
to the carrier slipping in 1QFY12 back into the negative operating margin
territory. At its 1QFY12 earnings announcement, SIA guided that it will
increase passenger capacity by a lower rate of 5% in FY12, instead of the
6% previously announced in its FY11 earnings announcement.
In our recent meeting with the company, management said it needs a lead
time of a month to move or cancel flights if there is a need to reduce capacity.
Its primary concern is to reallocate passengers who have pre-booked tickets
so as to maintain its reputation of exceptional reliability. In addition, its wide
network and regularity of flights make it easier to reallocate passengers.
If the global economy does move into a recession and air travel demand
falls, Singapore Airlines will have to prove that it can move more nimbly in
reducing capacity than in 2009.
Page 14
28 September 2011
Singapore Airlines Ltd
Opportunities – New Low-cost carrier (LCC) to capture a new market
In May 2011, SIA announced that it will launch a new LCC within a year. SIA
has incorporated and funded S$283m of capital into a wholly-owned
subsidiary, New Aviation Private Limited, for this purpose. SIA also announced
the appointment of 15-year SIA veteran Campbell Wilson as the founding
CEO of New Aviation. In addition, trade journal Aviation Week reported that
SIA has filed an application with the Intellectual Property Office of Singapore
for the naming rights to Scoot and indicated on its application that it plans
to use the Scoot brand name for airline and air travel services.
SIA also disclosed that the new subsidiary will operate independently and
managed separately from the flagship Singapore Airlines; and it will be an
LCC operating medium-to-long haul flights using Boeing’s 777-200 aircraft.
Its initial fleet would be acquired from its parent airline and reconfigured to a
new seating layout.
As the group’s flagship Singapore Airlines has not experienced much growth
over the last few years, this new wholly-owned LCC could provide the group
its next leg of growth. The key for SIA is to minimise the cannibalisation
effect of its new LCC has on Singapore Airlines. Singapore-based LCCs
have thus far focused on short-to-medium haul flights to around the region.
The low-cost medium-to-long haul flights could be a new business segment
for SIA.
SIA management also shared with us its vision of the group’s entire airline
operations. In the premium segment, Singapore Airlines will remain the carrier
of choice for passengers while SilkAir serves the up-and-coming secondand third-tier cities around the region. With SilkAir acting as the regional
feeder service for Singapore Airlines, this strategy has better integrated the
two airlines and created more cross-selling opportunities. In the low-cost
segment, the new LCC will serve the medium-to-long haul segment and
SIA’s 32.8% stake in Tiger Airways gives it considerable exposure to the
short-to-medium haul segment. Pending the take-up from minority
shareholders in Tiger Airways’ upcoming rights issue, SIA could potentially
increase its stake in Tiger Airways to up to 49%.
Page 15
28 September 2011
Singapore Airlines Ltd
Threats – Growing competition from Middle Eastern airlines
Competition in the aviation industry has historically been intense. Singapore
Airlines, which for a long time was the most profitable airline in the world,
has a natural bull’s eye on its back since rival airlines have been trying for
years to replicate its strengths and compete.
The list of top-10 airlines of Skytrax’s The World Airline Awards™ over the
last two years (Exhibit 15) include five other Asia-Pacific airlines and three
Middle Eastern airlines. This shows how ultra competitive the aviation sector
is in Asia-Pacific and the growing strength of the Middle Eastern airlines.
Exhibit 15: Skytrax’s The World Airline Awards™ – Airline of the year
(top 10)
Carrier
2011
2010
Qatar Airways
1
3
Singapore Airlines
2
2
Asiana Airlines
3
1
Cathay Pacific Airways
4
4
Thai Airways
5
9
Etihad Airways
6
6
Air New Zealand
7
5
Qantas Airways
8
7
Turkish Airlines
9
N/A
Emirates
10
8
Source: Skytrax
In the best cabin staff category, Singapore Airlines fell from first to third in
2011 and had the company of two other Asian airlines in the top three places
in both 2010 and 2011. As for the best in-flight entertainment category,
Singapore Airlines finished behind Emirates in both years.
Emirates, the most established of the Middle Eastern airlines, has a fleet of
aircraft, at an average age of 6.4 years as at Apr 2011, which is comparable
to Singapore Airlines’. In addition, SIA’s management acknowledges Emirates
as a peer airline, ahead of traditional rivals like Cathay Pacific Airways and
Qantas Airways. Together with the emergence of Qatar Airways and Etihad
Airways, the Middle Eastern airlines have brought the fight to Singapore
Airlines, especially in premium air travel.
Page 16
28 September 2011
Singapore Airlines Ltd
Threats – Competition from LCCs
We did a simple calculation of the two-year CAGR (compounded annual
growth rate) of the passenger capacities of three Asian full-service airlines
and three Asian LCCs. This exercise gives us a sense of how these airlines
have fared post-2009 crisis. We used the FY09 and FY11 passenger
capacities (in available-seat-kilometres) of Singapore Airlines, Tiger Airways
(both Mar year-ends), Qantas International, and Jetstar Asia (both Jun yearends). For Cathay Pacific and AirAsia (both Dec year-ends), we use the
corresponding capacity numbers from FY08 and FY10. While we understand
using capacity numbers from different year-ends and a sample of six airlines
will not give us the complete picture, this exercise gives us good colour on
how the Asian aviation industry has changed.
From Exhibit 16 below, Singapore Airlines and Qantas International both
experienced negative two-year CAGRs in their passenger capacities.
Although Cathay Pacific recorded a positive two-year CAGR, the total
capacity of these three full-service airlines fell by a two-year CAGR of -3%.
On the other hand, all the LCCs recorded double-digit two-year CAGRs and
the total capacity of these three LCCs experienced a two-year CAGR of
16.8%. Meanwhile, the total capacity of these six airlines fell slightly with a
two-year CAGR of -0.4%.
Exhibit 16: Two-year CAGR growth rate of selected airlines
35%
2 9 .3 %
30%
25%
2 1 .8 %
20%
1 6 .8 %
15%
1 2 .6 %
10%
4 .8 %
5%
0%
(0 .4 % )
(5 % )
(3 .0 % )
(3 .8 % )
(4 .2 % )
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to
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(1 0 % )
Source: Companies’ announcements
The result of this exercise put serious doubts into the argument that LCCs
are developing a new market segment, by encouraging new air travellers
who previously would not have travelled, and do not cannibalise the market
shares of full-service carriers. Thus, despite Singapore Airlines’ status as a
premium airline, it is still susceptible to the competition from LCCs.
Page 17
28 September 2011
Singapore Airlines Ltd
Threats – Qantas new Asia-based full-service carrier (RedQ)
Qantas has confirmed that it is planning to start a new 49%-owned fullservice carrier to be based in Asia. Media speculation indicates the new
airline will be named RedQ and Qantas is deciding between Kuala Lumpur
and Singapore to be the new carrier’s base. By basing the new airline in
Asia, Qantas is looking to ride on Asia’s growth, and especially China’s
booming aviation market. This move by Qantas signals its intention to further
its competition with Singapore Airlines, especially if the new airline picks
Singapore as its base, as it seeks to get a slice of the booming Asian
aviation pie.
Back in 2004, then-senior minister Lee Kuan Yew publicly said the government
will give priority on maintaining Singapore’s edge as an aviation hub over the
fortunes of SIA. Given Singapore’s better air connectivity and its government’s
inclination, there is a good chance of Qantas new carrier will be based here.
Threats – Possible recession and fuel price pressures
In its 1Q12 earnings announcement, SIA warned of 1) significant challenges
remain in the key markets of Europe and the United States, given the current
economic uncertainties; and 2) forward jet fuel prices remaining high and
volatile, making fuel cost its biggest challenge in the coming months. There
is a real threat of a blow-up of Europe’s debt problems, resulting in a global
recession. If this happens, air travel demand will be adversely affected.
However, it is unlikely to have a scenario which couples a recessionary
macro environment with high fuel prices.
Page 18
28 September 2011
Singapore Airlines Ltd
Section D: Financial highlights and analysis
SIA Group
Flagship Singapore Airlines is the main contributor to the Group. In FY11, it
contributed 74% of revenue and 66% of operating profit.
Exhibit 17: SIA Group’s reported FY11 revenue breakdown (total:
S$14.5b)
S IA Cargo
19%
S IA E ngineering
3%
S ilk A ir
4%
O thers
0%
S ingapore A irlines
74%
S ingapore A irlines
S IA Cargo
S IA E ngineering
S ilk A ir
O thers
Source: SIA
Exhibit 18: SIA Group’s reported FY11 operating profit breakdown
(total: S$1.27b)
S IA Cargo
12%
S IA E ngineering
11%
S ilk A ir
10%
S ingapore A irlines
66%
O thers
1%
S ingapore A irlines
S IA Cargo
S IA E ngineering
S ilk A ir
O thers
Source: SIA
Page 19
28 September 2011
Singapore Airlines Ltd
SIA’s previous subsidiary SATS Limited was divested in 2Q10. In order to
have a better basis of comparison, SATS’ impact was removed from Exhibit
19, which shows SIA’s historical revenue and operating profit. Exhibit 20
shows the cyclicality of SIA’s earnings.
Exhibit 19: SIA Group historical revenue and operating profit (removed
contribution of SATS, which was divested in FY10)
Re ve n u e (S $m )
O p e ra tin g p ro fit (S $m )
16,000
4,000
Revenue
(left s c ale)
12,000
3,000
8,000
2,000
4,000
1,000
O perating profit
(right s c ale)
0
F Y 00
F Y 01
F Y 02
F Y 03
F Y 04
F Y 05
F Y 06
Revenue (les s S A TS )
F Y 07
F Y 08
F Y 09
F Y 10
0
F Y 11
O perating profit (les s S A TS )
Source: SIA
Exhibit 20: SIA Group historical operating margin (removed
contribution of SATS, which was divested in FY10)
15%
12.5%
11.7%
10%
11.0%
9.7%
8.8%
7.3%
7.9%
5%
4.8%
8.2%
5.2%
4.7%
0%
0.3%
(0.1% )
(5% )
F Y 00
F Y 01
F Y 02
F Y 03
F Y 04
F Y 05
F Y 06
F Y 07
F Y 08
F Y 09
F Y 10
F Y 11
*1Q 12
Source: SIA
Page 20
28 September 2011
Singapore Airlines Ltd
Historically, SIA’s share of profit of associated and joint-venture companies
contributes to an average of 9.5% of its pre-tax profit.
Exhibit 21: % contribution of share of profit of associated and jointventure companies to pretax profit
% c o n tr ib u tio n
60%
5 2 .2 %
50%
40%
30%
1 7 .8 %
20%
1 4 .2 %
10%
1 2 .1 %
1 3 .1 %
5 .7 %
1 1 .3 %
6 .0 %
0%
1 2 .3 %
6 .3 %
3 .7 %
(1 0 % )
F Y0 0
(5 .5 % )
F Y0 1
F Y0 2
F Y0 3
F Y0 4
F Y0 5
F Y0 6
F Y0 7
F Y0 8
F Y0 9
F Y1 0
F Y1 1
M a r c h fin a n c ia l ye a r -e n d
Source: SIA
Page 21
28 September 2011
Singapore Airlines Ltd
Singapore Airlines
Exhibit 22: Singapore Airlines historical annual passenger load factor
L o a d fa cto r
L o a d fa cto r sp re a d
85%
24%
18%
75%
12%
10.9%
65%
6.6%
6.7%
4.8%
2.9%
55%
6%
3.7%
4.8%
2.9%
0.9%
0%
0.5%
(2.4% )
(4.3% )
45%
F Y 01
F Y 02
F Y 03
F Y 04
F Y 05
F Y 06
P as s enger load fac tor
F Y 07
F Y 08
F Y 09
B reak even load fac tor
F Y 10
F Y 11
(6% )
*1Q 12
S pread
Source: SIA
Exhibit 23: Singapore Airlines historical annual passenger yield
Yie ld a n d co st
Yie ld -co st sp re a d
7
12
5
8
3.7
3.3
3.1
4
2.6
3.0
3.1
2.5
3
3.0
2.6
2.4
1.8
1.9
0
F Y 01
F Y 02
F Y 03
F Y 04
F Y 05
P as s enger y ield (c ents /pk m )
F Y 06
F Y 07
F Y 08
F Y 09
F Y 10
P as s enger unit c os t (c ents /as k )
1
*1Q 12
F Y 11
S pread
Source: SIA
Exhibit 24: Singapore Airlines historical revenue and operating margin
Re ve n u e (S $m )
O p e ra tin g m a rg in (%)
4,000
25%
3,000
15%
2,000
5%
(1.2% )
1,000
(5% )
(6.4% )
(12.2% )
0
1Q 06
1Q 07
1Q 08
Revenue
1Q 09
1Q 10
1Q 11
(15% )
1Q 12
O perating m argin
Source: SIA
Page 22
28 September 2011
Singapore Airlines Ltd
Singapore Airlines lost money in only three quarters over the last 25 quarters.
During the height of the short-lived credit crunch financial crisis in 2009,
Singapore Airlines recorded negative operating margins of -12.2% in 1Q10
(quarter ended 30 Jun 09) and -6.4% in 2Q10. In the most recent quarter of
1Q12, Singapore Airlines recorded a negative margin of -1.2%. It has once
again slipped into the negative operating margin territory, partly as a result
of increasing capacity faster than air travel demand during the quarter.
SilkAir
SilkAir’s revenues have grown steadily over the years and recorded a record
year in both revenue and operating profit in FY11.
Exhibit 25: SilkAir historical revenue and operating margin
O p e ra tin g
m a rg in (%)
Re ve n u e (S $m )
800
20%
600
15%
400
10%
200
5%
0%
0
F Y 02
F Y 03
F Y 04
F Y 05
R evenue (S $)
F Y 06
F Y 07
F Y 08
F Y 09
F Y 10
F Y 11
O perating m argin (% )
Source: SIA
Page 23
28 September 2011
Singapore Airlines Ltd
SIA Cargo
Except for the crisis-hit FY10, SIA Cargo annual revenues over the last few
years hover around the S$3b mark. However, its profitability is quite volatile,
with operating margins in the range of -8.2% to 9.1% over the past 10 years.
Exhibit 26: SIA Cargo historical revenue and operating margin
O p e ra tin g
m a rg in (%)
Re ve n u e (S $m )
3,600
10%
2,700
5%
1,800
0%
(5% )
900
0
(10% )
F Y 02
F Y 03
F Y 04
F Y 05
F Y 06
F Y 07
Revenue
F Y 08
F Y 09
F Y 10
F Y 11
O perating m argin
Source: SIA
Exhibit 27: SIA Cargo capacity and load factor
Ca p a city
(m illio n to n n e -km )
L o a d fa cto r (%)
3,500
70%
3,250
65%
3,000
60%
2,750
55%
2,500
1Q 09
3Q 09
1Q 10
3Q 10
Capac ity (m illion tonne-k m )
1Q 11
3Q 11
50%
1Q 12
Load fac tor (% )
Source: SIA
Page 24
28 September 2011
Singapore Airlines Ltd
SIA Engineering
SIAEC’s revenue generated from the SIA Group has mostly remained flat
over the last 10 years. But its external revenue has grown steadily over the
same period.
Exhibit 28: SIA Engineering historical revenue
O p e ra tin g
m a rg in (%)
R e ve n u e (S $m )
800
30%
600
20%
400
10%
200
0
0%
F Y 00
F Y 01
F Y 02
F Y 03
R evenue from S IA
F Y 04
F Y 05
F Y 06
F Y 07
E x ternal revenue
F Y 08
F Y 09
F Y 10
F Y 11
O perating m argin
Source: SIA
Page 25
28 September 2011
Singapore Airlines Ltd
Section E: Valuation and recommendations
Not only is SIA in the cyclical aviation sector, but it also has a bigger exposure
to premium travel than most other airlines. This makes SIA’s earnings
fluctuate widely during good times and downturns. Thus, it is more sensible
to use a price-to-book (P/B) multiple to value SIA. Exhibit 29 below shows
the implied P/B multiples of SIA since Jan 2006. Over this period, the historical
P/B multiples has an average of 1.17x with a standard deviation of 0.17x.
Exhibit 29: Historical Price/Book of SIA
2.0
Price/Book
1.5
1.0
0.5
Jan 06
Jul 06
Jan 07
Jul 07
P ric e/B ook
Jan 08
Jul 08
A verage - 1.17x
Jan 09
Jul 09
Jan 10
+ 1 S D - 1.34x
Jul 10
Jan 11
Jul 11
-1 S D - 1.00x
Source: Bloomberg, OIR estimates
However, with its huge net cash position, we decided to adjust the P/B
multiple by removing cash per share from both its price and book value per
share to determine the historical P/B multiple of SIA’s business. Exhibit 30
below shows the implied net cash adjusted P/B multiples of SIA since Jan
2006. Over this period, the historical adjusted P/B multiples has a higher
average of 1.25x and a bigger standard deviation of 0.24x.
Exhibit 30: Historical Price/Book of SIA excluding net cash
P/B excluding net cash
2.0
1.5
1.0
0.5
Jan 06
Jul 06
Jan 07
Jul 07
P /B - net c as h
Jan 08
Jul 08
A verage - 1.25x
Jan 09
Jul 09
Jan 10
+ 1 S D - 1.49x
Jul 10
Jan 11
Jul 11
-1 S D - 1.01x
Source: Bloomberg, OIR estimates
Page 26
28 September 2011
Singapore Airlines Ltd
Together with the rest of the aviation sector, SIA’s share price has fallen
27% from this year’s peak in Jan 2011. The market seems to have already
priced a recession into SIA’s share price. During the worst sell-down of the
stock back in Mar 2009, the implied ex-net cash adjusted P/B multiple of
SIA reached a low of 0.69x. The 2009 financial crisis saw the ex-net cash
adjusted P/B multiple fall to around two standard deviations below historical
average. If that multiple of 0.76x and the 2009 low of 0.69x are used, we get
fair values of S$10.75 (downside of 5.7%) and S$10.17 (downside of 10.8%)
respectively.
Competition is not new to SIA as it has faced competition from global legacy
airlines, LCCs and Middle Eastern carriers for years and it has emerged
relatively unscathed. For example, despite the presence of competition the
group in FY11 made earnings of S$0.90 per share, up more than 400% from
the crisis-hit FY10. Looking back further, FY11 net earnings was also 2.9%
higher than in FY09. In addition, SIA has successfully maintained its standing
as a premium carrier and has probably the strongest balance sheet among
airlines to weather downturns. And its new wholly-owned medium-to-long
haul LCC could be the growth engine it has been searching for. There is
evidently still value in this name.
Valuation
Exhibit 31: Historical Price/Book of Cathay Pacific
P/B excluding net cash
2.0
1.5
1.0
0.5
Jan 06
Jul 06
Jan 07
P ric e/B ook
Jul 07
Jan 08
Jul 08
A verage - 1.30x
Jan 09
Jul 09
+ 1 S D - 1.59x
Jan 10
Jul 10
Jan 11
Jul 11
-1 S D - 1.01x
Source: Bloomberg, consensus estimates
Page 27
28 September 2011
Singapore Airlines Ltd
Exhibit 32: Historical Price/Book of Qantas
P/B excluding net cash
2.0
1.5
1.0
0.5
Jan 06
Jul 06
Jan 07
P ric e/B ook
Jul 07
Jan 08
Jul 08
A verage - 1.17x
Jan 09
Jul 09
+ 1 S D - 1.56x
Jan 10
Jul 10
Jan 11
Jul 11
-1 S D - 0.78x
Source: Bloomberg, consensus estimates
Historical P/Bs of two of SIA’s closest Asia Pacific peers, Cathay Pacific
Airways and Qantas Airways, were compared to SIA’s net cash adjusted P/
B. Exhibits 31 and 32 show the respective implied historical P/B multiples
of the two peers. Even after adjusting for SIA’s net cash position, Cathay
Pacific still has a wider P/B range while Qantas has the widest.
Exhibit 33: P/B comparison among Cathay Pacific, Qantas and SIA
Implied
Average
Standard SDs below
Price
P/B
P/B
deviation
average
Cathay Pacific (HK$)
12.72
0.84
1.30
0.29
1.56
Qantas (A$)
1.44
0.50
1.17
0.39
1.72
SIA (S$)
11.40
0.89
1.25
0.24
1.47
Source: Bloomberg, consensus estimates, OIR estimates
Cathay Pacific is currently trading at HK$12.72 and Qantas at A$1.44. Their
current implied forward P/Bs are 0.84x and 0.50x respectively. Trading at
S$11.40, SIA has an implied net cash adjusted P/B of 0.89x. While it seems
SIA is more expensive on a P/B basis compared to its peers, it is advisable
to investigate how far the three stocks are currently trading below their
respective historical average P/Bs. SIA is currently trading at 1.47 standard
deviations below its historical average P/B, while Cathay and Qantas are
not far away at 1.56 and 1.72 standard deviations below their respective
historical average P/Bs.
Page 28
28 September 2011
Singapore Airlines Ltd
The share prices of Cathay Pacific, Qantas and SIA have been pummelled
in recent weeks, signalling a big sell-down in the airline sector as investors
brace themselves for an economic recession or a significant drop in air
travel demand. Since it is still unsure if a recession will happen or ascertain
its impact, we assigned an ex-net cash adjusted P/B multiple of 1.01x, or
one standard deviation below the historical average, to our forecasted book
value less net cash per share of SIA. Added to the forecasted net cash per
share, this results in a fair value of S$12.59 per share, representing an
upside of 10.5%. Hence on valuation grounds, we initiate coverage on SIA
with a BUY.
Singapore Airlines's Key Financial Data
EARNINGS FORECAST
BALANCE SHEET
Year Ended Mar 31 (S$m)
Revenue
FY10
FY11
FY12F
FY13F As at Mar 31 (S$m)
FY10
FY11
FY12F
FY13F
12,707
14,525
14,835
15,477 Bank and cash balances
4,613
7,832
5,873
6,293
EBITDA
1,795
3,081
2,135
2,362 Other current assets
Depreciation & amortisation
-1,757
-1,696
-1,646
-1,649 Property, plant, and equipment
EBIT
39
1,385
488
714 Total assets
Net interest
-19
-33
-22
-23 Debt
Associates and JVs
149
175
138
152 Current liabilities excluding debt
Others
117
-108
65
Profit before tax
286
1,419
669
943 Shareholders equity
Income tax expense
PATMI
-6
216
-270
1,092
-123
492
-172 Minority interests
711 Total equity and liabilities
Year Ended Mar 31 (S$m)
FY10
FY11
FY12F
FY13F KEY RATES & RATIOS
Op profit before working cap. chg.
1,835
3,175
2,230
170
507
-209
101 Total liabilities
2,051
2,067
2,326
2,437
15,064
13,878
14,368
14,273
22,484
24,545
23,496
23,952
1,503
2,042
2,024
2,024
6,716
7,388
7,591
7,830
8,735
10,042
10,217
10,456
13,469
14,204
12,928
13,084
280
22,484
298
24,545
352
23,496
412
23,952
FY10
FY11
FY12F
FY13F
CASH FLOW
Working cap, taxes and int
2,440 EPS (S¢)
-43 NTA per share (S$)
18.0
90.4
40.6
57.8
11.24
11.78
10.75
10.87
Net cash from operations
2,004
3,682
2,020
2,397 EBIT margin (%)
0.3%
9.5%
3.3%
4.6%
Purchase of PP&E
-1,560
-1,224
-2,200
-1,499 Net profit margin (%)
1.7%
7.5%
3.3%
4.6%
537
530
-31
62.6
12.5
27.6
19.0
Investing cash flow
-1,431
-1,078
-2,147
Financing cash flow
558
1,310
399
Other investing flows
Net cash flow
-10 P/E (x)
-1,437 P/NTA (x)
970 EV/EBITDA (x)
109
3,220
-1,959
Cash at beginning of year
4,504
4,613
7,832
5,873 ROE (%)
421 Dividend yield (%)
Cash at end of year
4,613
7,832
5,873
6,293 Net gearing (%)
1.0
1.0
1.1
1.0
6.0
2.6
4.7
4.1
1.1%
12.3%
3.2%
4.4%
1.6%
7.7%
3.8%
5.4%
Net Cash Net Cash Net Cash Net Cash
Source: Company data, OIR estimates
Page 29
28 September 2011
Singapore Airlines Ltd
SHAREHOLDING DECLARATION:
The analyst/analysts who wrote this report holds NIL shares in the above security.
RATINGS AND RECOMMENDATIONS:
OCBC Investment Research’s (OIR) technical comments and recommendations are short-term and trading
oriented.
- However, OIR’s fundamental views and ratings (Buy, Hold, Sell) are medium-term calls within a 12-month
investment horizon. OIR’s Buy = More than 10% upside from the current price; Hold = Trade within +/-10%
from the current price; Sell = More than 10% downside from the current price.
- For companies with less than S$150m market capitalization, OIR’s Buy = More than 30% upside from the
current price; Hold = Trade within +/- 30% from the current price; Sell = More than 30% downside from the
current price.
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Page 30
For OCBC Investment Research Pte Ltd
Carmen Lee
Head of Research
28 September 2011