Is a higher rebound on the horizon for SIA?

Profit recovery relies on expensive hedges expiring.

Singapore Airlines (SIA) is hurtling towards more substantial fuel cost savings as expensive hedges expire and drive a turnaround in earnings.

According to a report by DBS, SIA is projected to consume over 40m barrels of jet fuel per year. But with jet fuel currently at US$50 (roughly $66.94) per barrel in contrast to nearly US$120 ($160.66) per barrel at end-2014, the airline will reap substantial benefits.

In line with this, SIA’s net profit is seen to rebound from $368m in FY15 to $711m in FY16. DBS further sees a 37% YoY pick-up to $976m in FY17, followed by another 8% YoY rise to $1.05b in FY18.

Meanwhile, as SIA’s profits begin to return to a normalised level, DBS believes SIA and investors could turn their focus towards the airline’s cash hoard of over $3b, or about $3.20 per share.

At the minimum, DBS opines that SIA will up the ante by raising its dividend payout to $0.50 per share in end-FY17 and end-FY18 as earnings improve.

Further upside may also come from a return of more cash in the form of special dividends or even capital reduction, as SIA has done before.