Singapore Airlines

Kim Eng on 7 Feb 2014

Another soft quarter
Singapore Airlines (SIA) reported a weak set of 3QFY3/14 results with net income declining by 64.8% YoY to SGD50.1m. The drag came from a SGD40.8m loss from associates (largely from Tiger Airways) and SGD80m in fines imposed on its cargo arm. SilkAir posted sharp declines in its yield (3QFY3/14: 13.1cents; 3QFY3/13: 14.6cents) and load factor (70.0%; 75.3%), which led to a plunge in its profit contribution. Promotional offers by the parent airline to counter heightened competition saw yields continue to languish. The only positive takeaway was the surprise profit at SIA Cargo due
to lower unit cost on rationalisation of its freighter fleet.

Headwinds persist, near term re-rating unlikely

The risk of overcapacity looms large in the Singapore aviation market in the near term, in our view. Short haul routes would be the most affected, as evidenced by the weak load factors posted by SilkAir (70.0%) and Tigerair (75.8%) for 3QFY3/14, the traditional peak travel season. We believe the group’s performance would have to be supported by its engineering division. For exposure to the Singapore’s aviation market, we prefer SIAEC (BUY, TP: SGD6.34) as the stock is a structural winner and direct proxy to the doubling of capacity at Changi Airport. SIA’s valuation may look attractive but a meaningful re-rating in the near term may be challenging given the lingering headwinds. We trim our FY3/14-16 EPS by 5-18% and roll forward our valuation year to FY3/15 and
trim our TP to SGD10.00 (0.9x FY3/15E P/BV). Maintain HOLD.