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Singapore Airlines share price: what to expect from its Q1 results

SIA’s three-year transformation programme will support the airline to an earnings recovery but its exposure to external factors such as global economic growth and changes to oil prices could potentially dampen growth.

Singapore Airlines Source: Bloomberg

Singapore’s flag carrier Singapore Airlines (SIA) is announcing its fiscal first quarter results for the three months ended June 30, 2019, post-trading hours on July 31, 2019.

The carrier which provides airline flights to more than 60 destinations, is ranked as the world’s best airline by airline consultancy Skytrax since 2018 and has received numerous accolations for its customer service and in-flight experience. It owns regional airline SilkAir and low-cost carrier Scoot.

The firm’s parent company is Singaporean holding firm Temasek Holdings, who has a majority stake in SIA at 56%. SIA also has other airline-related subsidiaries, such as SIA Engineering and SIA Cargo.

Net profit for the previous quarter fell by 28%

In May, the group posted a 28% fall in net profit for the fiscal fourth quarter, at S$202.6 million, compared to S$281.1 million a year ago. Net profit for the full-financial year sank by 47.5% to S$683 million, due mainly to higher fuel prices and costs incurred in preparation for SilkAir’s merger with the parent airline.

Despite the profit plunge, the group had reported a record full-year revenue of S$16.3 billion for the recent financial year, compared to S$15.8 billion a year ago, attributing the performance to its transformation initiatives. For the fourth quarter, the group reported a 1.4% increase in revenue to S$4.08 billion from S$4.02 billion a year ago.

A volatile year for Singapore Airlines’ share price

Singapore Airlines share price was little changed, rising by 0.11% or S$0.01, to S$9.50 at around 2.30pm on Wednesday (July 17, 2019).

Year-to-date, the group’s shares have risen by 1.3%, from S$9.38 on January 2, 2019.

The United States (US)-China trade tensions, higher oil prices, and weak global economic growth have led to volatility to the airline company’s stock, peaking at year-to-date highs of S$10.19 per share on February 25, 2019 and stumbling to lows of S$9.06 per share on June 4, 2019.

SIA’s transformation programme providing material improvements

In a DBS research report dated May 21, 2019 released days after the airline's fiscal first quarter results, the bank made a ‘Buy’ call on the stock, with a target price of S$10.80, citing material improvements on the firm’s performance helped by the carrier’s three-year transformation programme.

‘SIA’s transformation programme is beginning to make a material difference in helping the group’s earnings recover, with revenue growth finally returning after years of stagnation and cost management efforts also bearing fruit. This was evident as SIA posted a stronger profit performance in the second half of financial year 2019 compared to the first half. We project SIA’s profitability to improve in the financial year 2020 as the transformation programme continues,’ commented DBS analyst Paul Yong in the report.

The bank is bullish on the returns from SIA’s transformation programme and is predicting for a recovery on its earnings. But DBS did acknowledge SIA’s susceptible exposure to external factors such as global economic growth and changes to oil prices, as possible dampeners to growth.

US-China trade conflict, weaker global economic outlook to impact performance

In its earlier earnings report, SIA said the ongoing trade disputes and slowing economic growth in key markets poses uncertainty to the operating environment and efforts will be made to capture opportunities and mitigate weaknesses in both cargo and passenger segments.

Most of SIA’s key markets, including those that have seen significant capacity growth such as the US, Japan, Indonesia and New Zealand, continue to grow at a healthy pace, it had said. Meanwhile, China's international traffic growth rates have softened while the supply in the market increases.

Even so, SIA’s current passenger load factor is at an all-time-high of 83%, while revenue per passenger kilometre rose 7% year-on-year. The higher load factor reflects a better utilization of SIA’s aircraft per flight, which is an encouraging reflection of customers travelling more even in the weak economic environment.

Early this month, China’s president Xi and US president Trump agreed to resume trade talks, a decision which helped avoid the escalation of their multi-billion tariff war.

Mr Trump had said that he will put on hold his earlier threat to slap on 25% of tariffs on US$300 billion in Chinese imports. The US president also claimed that China, in exchange, has agreed to buy a ‘tremendous amount’ of American food and agricultural products.

Any additional aggravation between the US and China would indirectly impact consumer’s appetite to travel as the trade uncertainty would make customers cut down on their discretionary spending. The trade conflict, if unsolved in the near term will also contribute to a weaker global economic performance, hence causing businesses including SIA, to slow down.

Fuel costs may add pressure to airline earnings

In its first quarter results statement, SIA said that the expenditure for the group in its recent financial year rose by 7% or S$999 million, with higher net fuel costs accounting for two-thirds of the increase. Fuel expenditure had climbed 17.6%, or S$688 million, as jet fuel prices gained by an average 21.6% during the year.

As fuel is a major component to SIA’s operations, a sustained rise in oil prices would dampen its profits. The carrier has already hedged 69% of its fuel requirement for this fiscal financial year, but it will still have to bear the burden on the remaining unhedged oil portion if oil prices continue its climb.

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