SIA to face earnings headwinds from European unrest

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SINGAPORE (July 19): UOB Kay Hian is maintaining its “hold” recommendation on Singapore Airlines (SIA) with a marginally reduced target price of S$11.50, from S$11.60 previously, on the political and social unrest that has been plaguing Europe in recent times.  

This comes after the July 14 Bastille Day attack in Nice, as well as a failed military coup attempt in Turkey on July 16.

In a Tuesday report, analyst K Ajith and Sophie Leong say the latest spate of terrorist attacks and the coup attempt in Europe will impact the demand for travel to the region in the coming quarters. In turn, they expect SIA’s loads and yields to Europe to decline.

“Europe is a significant market for Singapore Airlines (SIA) with 14 destinations within Europe and about 30% of SIA’s seat capacity in km-terms is directed to Europe,” explain the analysts.

They highlight that even prior to the attack in Nice, SIA’s pax loads were shown to have weakened for three consecutive months, with the decline in load factors to Europe accelerating from 0.6% in April to 5% in June.

As such, Ajith and Leong believe that pax yields are likely to remain weak in FY17: “Europe is an important market for SIA, as it comprises a higher proportion of business travel. Any decline in travel to the region could have a disproportionate impact on overall yields.”

They add that this could be exacerbated by the fact that local yields out of Singapore tend to be higher than overseas yields. Plus, a weakened British pound and euro post-Brexit would also have a net negative impact on SIA’s yields should outbound travel from Singapore were to slow down.

The analysts reckon that flat pax traffic for SilkAir in June, as opposed to its double-digit growth rates from Jan to May 16, could be a reflection of slowdown in discretionary short-haul travel as well. Conversely, Scoot’s pax traffic rose 59.5% y-o-y in June.

Despite earnings headwinds, UOB projects that SIA’s stock price is likely to be supported by dividend yield.

“Barring a steep decline in earnings and cash flow, we believe SIA’s share price will be supported by the attractive 4.6% FY17 dividend yield,” say Ajith and Leong, who anticipate continued investor interest as a result. Their preferred entry level is at S$10.30, or 5% yield.

As at 10:29 a.m., SIA shares are trading 1.17% lower at S$10.95.