Singapore Airlines

Kim Eng on 6 Nov 2012

2Q / 1HFY3/13 results disappointing. SIA A recorded 1HFY3/13 PATMI of SGD168m that was just above 30% of o ours and consensus’ full-year estimates, disappointing the street. 2QFY3 3/13 PATMI of SGD90m was a 54% decline (-SGD104m) YoY affected by non-operating items and poorer operating profit. 2QFY3/13 operatinng profit was tainted by SIA Cargo’s operating loss tripling YoY to SGD D50m. We maintain our HOLD call on SIA, premised on a challengi ing aviation sector outlook especially for full-service carriers like SIIA where promotional fares continue to depress yields and fuel prices r remain at elevated levels.

Depressed cargo segment calls for parked freighter. SIA stated that the air cargo market remains badly depresssed, where freight rates have declined to a level which challenges thee viability of certain flights.
Hence, the company has decided to rem move one of its 13 freighters from service from Jan 2013 to May 2014 to o rationalise capacity. Despite this move to stem the bleeding, we still see Cargo as a segment of
weakness in the near-term for SIA.

Passenger segments uninspiring. SIA A’s long-haul segment load factor of 79.8% was exactly at break-even, , while SilkAir’s load factor of 72.5% was more positive at 1.2ppts above its break-even (71.3%). Both
passenger segments combined to show a marginal 1% improvement in operating profit YoY. More disconcerting was the fact that long-haul passenger yields at SG11.4cts/pkm were the lowest in more than two years, last seen only during the GFC-hit year of FY3/10. Promotional fares to stimulate demand will continue to d depress yields going forward.

Outlook remains challenging, maintain n HOLD. SIA’s disappointing 2Q & 1HFY3/13 results form the basis for reducing our FY3/13-15 earnings estimates by 10-15%. We now w base its valuation on 0.9x FY3/14 Book Value (1 SD below mean) to o account for the increasingly challenging outlook. Catalysts to upgrade the stock would include the ending of promotional fares and fue el prices sustained below USD120/bbl, both of which look an unlikely y proposition in the near-term.