Daiwa stays cautious on Singapore Airlines despite earnings beat, dividend surprise

Singapore two-dollar bills

Daiwa remained cautious on Singapore Airlines despite an earnings beat and a dividend surprise, pointing instead to concerns over costs.

It noted that Singapore Airlines’ fiscal fourth quarter operating profit of S$215 million beat its estimate of S$154 million on stronger-than-expected revenue and lower-than-expected operating costs items such as jet fuel and landing and parking charges. It also noted that the final dividend per share of S$0.30 was a “significant positive surprise,” as it had only expected S$0.10.

However, while the passenger yield trend at the parent airline finally reversed its declines, with yield up a marginal 1 percent on-year, the passenger load factor (PLF) of 81.1 percent for the quarter was still below the breakeven level of 84.5 percent, Daiwa said in a note on Thursday.

“While we are cautiously optimistic that SIA’s main carrier passenger yield and PLF could exhibit an upward trend over the coming year, improvement in these areas will likely be gradual and might not be sufficient to offset rising operational costs,” it said.

Those costs include higher parking and landing charges announced by Changi Airport Group from July 1, rising jet fuel costs as global crude prices rise, and higher depreciation costs from new aircraft delivery and a shift to a net debt position, Daiwa noted.

It kept a Hold call.

“Within the Singapore aviation context, we prefer the aviation service providers vs. airlines,” it said. “While we see SIA’s passenger yield likely having bottomed in FY18, we foresee increasing operational expenses capping its profitability over the next two to three years.”

The stock ended up 3.77 percent at S$11.56 on Friday.