UOB KayHian cut its profit outlook for Singapore Airlines amid further losses from 20 percent-owned Virgin Australia (VAH) and amid a rise in jet fuel prices.
A weak fiscal second quarter is expected amid a 42 percent on-year rise in jet fuel costs, even with an “excellent” August, with passenger load factors improving by 4.3 percentage points at the group level, UOB KayHian said in a note on Tuesday.
“Barring a high-single-digit increase in passenger yields and a reduction in non-fuel cost, SIA is likely to show a year-on-year decline in operating profit” for the fiscal second quarter, it said. “Coupled with lower associate earnings, we expect SIA’s earnings to disappoint
the street’s lofty expectations of a S$833 million profit.”
UOB KayHian said it was neutral on the operating statistics.
“While the operating statistics were encouraging, this could come at the expense of yields,” it said.
VAH also reported a “hefty” fiscal year loss of A$681 million due to two one-offs, a A$511.4 million de-recognition of deferred tax assets and a A$121 million impairment loss on VAH International on higher fuel cost and lower unit revenue assumptions, the brokerage noted.
Singapore Airlines is likely to recognize around S$137 million of its share of VAH’s losses in its fiscal second quarter, UOB KayHian said, adding that lowers its profit before tax forecast by S$91 million.
The brokerage cut its target price to S$10.40 from S$11.10, keeping a Hold call.
“We believe SIA could face cost pressures over the next two quarters from higher fuel prices and a likely increase in wage bill, given ongoing negotiations with pilots. Associate’s performance is also likely to be lacklustre, given VAH’s provisions,” UOB KayHian said.
Shares of Singapore Airlines were down 0.73 percent at S$9.50 at 11:59 A.M. SGT.