Singapore Airlines

Kim Eng on 13 Feb 2013

3QFY3/13 results weak, downgrade to SELL. SIA reported 3QFY3/13 results that were below expectations, as 9MFY3/13 EBIT of SGD273.4m only came in at 70% of consensus’ full-year forecasts despite 3Q being a seasonal peak. Despite 3QFY3/13 operating profit dropping 17% YoY, PATMI rose 5% due to non-operating items such as surpluses on sale of aircraft and parts and higher net interest income. We cut our profit forecasts in FY3/13-15 by 7-9% to reflect the increasingly challenging competitive environment facing premium carriers like SIA. Downgrade to SELL, TP trimmed to SGD10.40.

Yields depressed, breakeven load factors remain high. SIA’s 3QFY3/13 passenger yields (down 6% YoY) continue to face downward pressure from promotional fares implemented to counter industry competition. Break-even load factors remained at heightened levels of ~80%, which could not be matched by actual passenger loads (79.3%) this quarter. This meant that SIA yet again had to rely on indirect revenues (eg: aircraft leasing) and incidental revenue (eg: in-flight sales) to record an operating profit.

Outlook guidance tentative. SIA Cargo continued to be a drag on SIA’s operating profit despite its losses narrowing to SGD29m this quarter (from SGD40m YoY). Management also revealed that Scoot load factors have been encouraging (>80%). However, their guidance on the overall outlook of international air travel continues to be one that is challenging: Passenger and cargo yields are expected to come under pressure while jet fuel continues to be at historical highs.

No compelling reason to own SIA, downgrade to SELL. SIA’s disappointing results provide continued affirmation of our view that airlines, especially full-service carriers, face an immensely challenging competitive environment with no reprieve in sight. Our trimmed target price of SGD10.40 remains pegged to 0.9x FY3/14 P/BV, 1 standard deviation below its historical mean. With dividend yields at 2-3%, we see no reason to own the stock. Downgrade to SELL.