Kim Eng 26 Apr 2012
Downgrade to HOLD, expect weak 4Q results. Singapore Airlines (SIA) is expected to report a weak set of 4QFY3/12 results, dragged down by ballooning fuel prices. Earnings are forecast to come in at SGD75m, representing a 56% YoY decline. Concerns over jet fuel prices, together with lingering uncertainties in the global economy, in particular Europe, pose strong headwinds to SIA and the aviation sector as a whole. We downgrade the stock to HOLD with the target price reduced to SGD11.05 based on its historical mean P/BV of 1.0x. While SIA’s strong fundamentals are not in doubt, we think there will be a better entry point in the next 6-12 months.
No let up in the headwinds. High jet fuel prices are not coming down anytime soon and will continue to plague global airlines in the near future. While SIA’s passenger yields seem to be steadying, cargo yields are showing a decline of about 5% YoY and this could be another roadblock to profitability. Also waiting to be resolved is the segregation of routes between Tiger Airways and Scoot to minimise cannibalisation of passengers. It was recently announced that Scoot would be plying the Singapore-Bangkok route, which Tiger is currently already in.
Riding out the storm. SIA’s fortunes are closely tied to the cyclical ups and downs of the economy, whether global or domestic. Given the current developments in Europe, we do not think the global economy is out of the woods yet. We think that SIA will test its historical P/BV trough of 0.8x, which will provide a more attractive entry point for investors looking to ride the recovery.
Little to cheer but watch it close. While there is little to cheer for SIA in the near term, existing investors can take heart that its strong balance sheet and positive earnings will sustain a dividend payout of 5.7% (based on DPS quantum of SG 60cts per share). We will turn buyers at prices below SGD10.00 while keeping an eye out for signs of economic improvement in Europe.
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