Singapore Airlines

UOBKayhian on 1 Jul 2015

FY16F PE (x): 16.6
FY17F PE (x): 13.2

SIA’s load factors to Europe fell for two consecutive months, with Europe showing the largest yoy decline. Singapore Airlines’ (SIA) overall pax load factor fell 1.3ppt in 2MFY16 (Mar-Apr 15), with pax load factor to Europe declining by an average of 5.6ppt. Europe accounts for 28% of SIA’s (parent airline) capacity and is also a key market for business travels. The decline in Europe’s load factor could be due to Qatar Airways’ introduction of the new Airbus A350 aircraft on 11 May. Qatar Airways is also increasing its flight frequency to Doha to thrice weekly, from twice weekly, by August. According to the Centre for Asia Pacific Aviation, this will result in a 67% rise in Qatar Airways’ capacity out of Singapore. For SIA, this will lead to increased competition on Europe and North America routes as the Middle East is an important connecting point to these regions. Both load factors and yields are likely to ease in the coming months. We believe the market is aware of the risk of the lower yields but may not be aware of the cause. In addition, there is a real risk of yields deteriorating in the coming months. This is likely to be reflected in SIA’s 1QFY16 results in August. Much of the optimism we had for SIA stemmed from six consecutive months of yield improvement from Sep 14 as well as the likely cost efficiencies from new deliveries. However, Qatar Airway’s latest move has raised the ante for SIA. Maintain HOLD but lower our target price from S$12.40 to S$11.60. We also lower our fair value P/B multiple for SIA’s core business from 0.9x to 0.85x. Core ROE ex- SIAEC is estimated at 5.1% due in part to its net cash of S$3.6b. Suggested entry level is S$10.30, which is -1SD on P/B.