Broker's take: HSBC Global Research trims target price for SIA to S$11.20, cites eroding yields
SINGAPORE Airlines (SIA) could face limited prospects of improving returns amid yield pressure on transpacific routes, said HSBC Global Research, cutting its target price for the counter from S$12 to S$11.20.
While the airline is benefiting from lower fuel prices and unwinding fuel hedges, yield erosion will continue due to the lacklustre macro environment resulting in soft premium volumes, capacity growth, tough competition from rival carriers and a lower fuel surcharge.
Analyst Jack Xu said: "New capacity might not translate into satisfactory returns. We think acceleration in new capacity is likely to dilute overall returns as most of these aircraft will start servicing long-haul destinations such as EU and North America markets, where margins are slim amid intense competition."
SIA plans to open up its network with new points using the fuel efficient Airbus 350. SilkAir and budget arm Scoot will also be receiving new planes from Boeing.
Mr Xu added: "While some of the key short-haul routes in Asia-Pacific regions should do well, we expect rising risks of price competition on transpacific routes. As a result of expected yield erosion, we cut our FY17-18 net profit estimates by 11 per cent and 25 per cent, respectively, putting us 5 per cent and 14 per cent below market consensus."
Lower fuel expenses, Tigerair and Scoot merger synergies will offset yield pressure that will likely result in a small margin expansion in FY17, he also highlighted.
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
Capital Markets & Currencies
Why the yen is so weak and what that means for Japan
Europe: Stoxx ends lower as auto giants weigh; investors parse inflation data
US: Wall Street stocks fall as markets weigh strong wage data, Fed meeting
Japan may have spent 5.5 trillion yen on Apr 29 intervention, BOJ data suggests
Singapore stocks rise, tracking regional bourses; STI up 0.3%
Asia: Markets build on Wall Street rally, yen holds bounce