Singapore Airlines

Kim Eng on 20 Mar 2012

Good news, bad news. Singapore Airlines’ (SIA) loads have levelled off and the worst appears to be over with signs of an economic pickup. But high fuel prices will continue to weigh on earnings. In fact, with the economic recovery likely to nudge up fuel prices, earnings may be muzzled over the next 12 months. SIA is best-positioned to emerge into strength. We maintain our Buy call and target price of $14.40.

Loads have bottomed out. February load factors showed that passenger loads were maintained in the high seventies. Both capacity and traffic were up, thanks to the Singapore Airshow during the month. Cargo surprised with a pickup in both loads and traffic, but load factors remained weak, in the low sixties. SIA had cut cargo capacity by 20% since mid-February. In summary, the data gives us confidence that traffic has bottomed out and is well-positioned for an eventual recovery.

Costs up due to fuel. Jet fuel prices are at a 12-month high at US$137/bbl. While the stronger S$ and SIA’s recent move to raise fuel surcharges may offer some respite, fuel is still a major drag on earnings. We anticipate that jet fuel will remain at this level or trend higher, dashing hopes for some recovery in earnings. We are factoring in jet fuel at US$135/bbl for FY Mar13 (US$128/bbl previously), which results in our FY Mar13F earnings being cut by 25% to $787.9m.

Trying to succeed where others have failed. Scoot, SIA’s budget long-haul carrier, will begin flight operations around June. While it is difficult to see how the business can succeed when rival AirAsia X is rationalising capacity, we believe that Scoot is positioning itself for an imminent recovery in the global economy. Besides, there may be resident Singaporeans who are likely to embrace this model.

Still the best for recovery. We expect SIA to end the current financial year with a solid quarter and to build through the recovery cycle. However, the near-term earnings risk from fuel prices remains. With operating earnings volatile, we retain our asset-based valuation of SIA. Our target price is unchanged at $14.40, based on median 1.2x P/BV. Maintain Buy.