Business Times - 07 Feb 2009
SINGAPORE Airlines (SIA) will report a huge $2.1 billion hedging loss equivalent to a loss per share of $1.70, says a local analyst.
K Ajith of UOB-Kay Hian calculates that with jet fuel having slumped from US$119 a barrel in October 2008 to US$54 by year-end, SIA will suffer a hedging loss that will depress its book value from $12.25 a share to $10.55.
The estimate is based on SIA's mark-to-market accounting of its outlay on fuel, which UOB-Kay Hian estimates to be hedged at an average of about US$110 a barrel.
'At present, SIA is trading at 0.9 times P/B. And if it remains at 0.9 times with book value dropped, it should trade at a reduced target price of $9.70,' says UOB-Kay Hian.
SIA, which will report its third-quarter earnings on Feb 10, slid 32 cents to close at $10.74 yesterday.
The impact of the hedging loss is not new - SIA chief executive Chew Choon Seng said at the Q2 results briefing three months ago that fuel was hedged around $115 a barrel. But this is the first time an analyst has worked out the potential loss, albeit that this is a paper loss at present.
Some analysts, such as Vincent Ng of S&P Equity Research, warn against reading too much into paper losses on fuel hedging. 'Hedge accounting generally goes straight to the reserves in the balance sheet, rather than the profit-and-loss account,' he explained. 'Meanwhile, SIA also pays spot prices for half of its fuel needs.'
Also, SIA's hedge contracts go forward some 18 months from the contract date, by which time the actual fuel price could climb back closer to the hedged price.
Nevertheless, few have reason to be upbeat on SIA's immediate prospects - or those of the aviation sector as a whole.
The industry is in a tailspin thanks to the global economic slowdown and the financial meltdown. Passenger and cargo traffic have dived, and combined with excess capacity, this has put pressure on yields.
Analysts expect SIA to have suffered a 10-15 per cent drop in passenger yield in the October-December 2008 quarter due to falling premium seat sales and falls in the key Australian and British currencies against the Sing dollar. Meanwhile, air cargo operations have been racking up losses since the first half of the current financial year, prompting SIA to start grounding planes and to ask pilots to take no-pay leave.
SIA has cut capacity about 3 per cent system-wide over the past two months, including scrapping of several of its relatively recent all-business class non-stop services to New York and Los Angeles.
One of the more upbeat forecasts for SIA is from CIMB's Raymond Yap, who sees a Q3 net profit of $385.6 million, down 35 per cent year-on-year. But Mr Yap expects SIA to post a net profit of only $55.8 million for the January-March quarter, which is traditionally slow.
'If we are correct, SIA could achieve a full-year net profit of $1.253.8 billion, about 10 per cent higher than our official forecast of $1.137 billion, but down almost 40 per cent from a year ago,' he said in a paper yesterday.
UOB-Kay Hian's Mr Ajith expects operating profit to decline to $118 million in Q3 2009. He is forecasting an FY 2009 net profit of $915.3 million, below the consensus estimate of $1.1 billion.
Citigroup Global Markets is also downbeat on SIA and has a medium-term price target of $9. Besides the tough operating environment, contributions from subsidiaries and associates will be under pressure, Citigroup said.
'SIA would be earning an ROE well below its cost of capital, which suggests that its share price could trade below book value during this stage of the economic downturn,' Citi analyst Robert Kong noted this week. 'With earnings and price performance volatile, it is difficult to have a long-run fair value for an airline stock.'
Citi forecasts SIA's FY 2010 return on equity will fall to 6.7 per cent, from 9.6 per cent in FY 2009.
Going forward, the issue for SIA is how it manages capacity and costs amid deteriorating demand, analysts say.
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