Oversupply anxieties push down jet fuel prices by 18%

SIA is going to be a big winner.

Oil prices have corrected to their lowest level since Jun 2012, on oversupply anxieties. According to press reports, Saudi Arabia has cut its official crude selling prices, suggesting that the price downtrend could be sustainable.
According to Maybank Kim Eng, jet fuel prices have declined 18% YTD to USD105/bbl. With fuel at c.40% of its expense, SIA should be a major winner.

Maybank KE’s sensitivity analysis suggests that every USD5/bbl decline in jet fuel prices could add SGD0.17 or 22% to our FY3/16E EPS, ceteris paribus. About 52% of SIA’s FY3/15E jet-fuel need has been hedged at c.USD116/bbl. SIA can hedge up to eight quarters ahead.

Here’s more from Maybank KE:

Our estimates are substantially above consensus. We believe the Street has yet to model in the sharp oil-price decline. A positive earnings-revision cycle could be on the way, we reckon. While regional overcapacity remains a threat, we believe the market has not given SIA enough credit for its proactive capacity cutbacks (FY3/15E: only +1% YoY for parent airline). Loads remain high in spite of the industry’s surplus. And despite its strongest balance sheet of SGD3.60 net cash per share, SIA trades at a 12% P/BV discount to full-service carriers in Asia.

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