Singapore Airlines

Kim Eng on 31 Jul 2012

Showing a 1Q profit, but only barely. Singapore Airlines (SIA) posted a 1QFY3/13 NPATMI of SGD78m (+SGD33m, +73% YoY), which was helped by the addition of incidentals, as core SIA parent operations were still mired in loss-making territory. Although SIA remains a strong contender to benefit from an airline sector-wide recovery, we continue to see no clear signs of that as yet. We maintain our HOLD call, pegged to 1.0x FY3/13 P/BV, in line with our neutral view of the regional airline sector.

Long-haul profitable only after adding incidentals. SIA’s long-haul operations were still struggling for profitability as load factors of 79.5% were more than a full percentage point below its breakeven load factor of 80.7% (Fig 3). Yields were negatively affected by promotions to improve loads. Helped by indirect revenue such as leasing of aircraft and in-flight sales, SIA’s long-haul segment eked out an SGD85mil operating profit for the quarter.

SilkAir shows promise, Cargo still a drag. The company’s push forward with regional arm SilkAir was evident, with a 25% YoY increase in capacity this quarter. This effort seemed to pay off with SilkAir being the only business segment posting load factors (76.4%) above break-even (75.0%). SIA Cargo had yet another poor quarter, posting an operating loss of SGD49m, worse by SGD35m YoY. The company guided that forward freight indicators remain weak.

Headwinds persist, maintain HOLD. SIA’s 1QFY3/13 results reinforce our view that airlines continue to face significant headwinds such as yield and cost pressures. We maintain our HOLD recommendation, with valuation pegged to 1.0x FY3/13 P/BV. Our target price implies an entry price of SGD9.70, with existing investors able to continue enjoying a decent yield of ~4% p.a. SIA remains a premium airline with a fundamentally strong balance sheet (net cash ~SGD4b) that should comfortably weather a prolonged global airline slump.