- Upgrade to BUY with higher TP of SGD12.00 on sustained EPS growth over FY3/14E-17E (51% CAGR).
- Overcapacity in home base should ease as Singapore-based carriers scale back aggressive fleet expansion plans.
- We project moderate seat capacity growth of 4.3%/3.7% in 2014E/2015E for Singapore-based carriers.
Singapore Airlines (SIA) has endured considerable pressure on its profitability in recent years as Singapore-based carriers embarked on aggressive fleet expansion. But there are signs of a pullback. We revise our FY14E/15E/16E by -11%/+11%/+15% and see sustained EPS CAGR of 51% over FY3/14E-17E. We see limited downside risk given the near-trough valuations and SIA’s solid net cash position (SGD3.50 per share, 34% of market capitalisation). Upgrade to BUY with a higher TP of SGD12.00 (from SGD10.00) based on 1.05x FY3/15E P/BV.
Aggressive fleet expansion spawns overcapacity
Surging demand for air travel in recent years propelled Singapore-based carriers to expand their aircraft fleet aggressively. Last year alone, seat capacity grew 8% YoY, leading to overcapacity. This surplus was acutely felt by short-haul carriers as they watched their earnings tumble. Profitability at SIA’s mainline services also came under pressure because of the surplus in its home base.
Glut set to ease, moderate expansion to come
The good news is Singapore-based carriers are keenly aware of the supply glut and are taking steps to scale back their expansion plans. Qantas has announced that Jetstar Asia will put its fleet growth plans on hold and Tigerair Singapore’s decision to cancel nine aircraft due for delivery in 2014/2015 should reduce capacity growth by 3.5%. We therefore project moderate seat capacity growth of 4.3%/3.7% in 2014E/2015E for Singapore-based carriers.
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