Singapore Airlines - Reality check

■ Management warns that market expectations are too optimistic.

■ Earnings recovery solely premised on lower fuel price.

■ Maintain HOLD with lower target price of SGD11.85 on softer load factor outlook

What’s New
Management gave a dose of reality at the analyst briefing and said “the analyst community is more optimistic than the company is”. Yields have fallen considerably since May especially on transpacific and European routes whilst regional short-haul routes are stable. Cargo yields remain lacklustre due to industry overcapacity. Management has also reduced aircraft induction numbers for FY18- 19 suggesting that the headwinds are structural.

What’s Our View
SIA is struggling to nestle its space in the industry. Its business strategy to focus on premium business is at odds with the increasingly budget-centric profile of Southeast Asian passengers. Regional competitors have also stepped up its game and are serious contenders. Management is aware of these predicaments but is adamant that its strategy will set itself apart from the others.

The results however points to the contrary: the parent airline’s route network has shrunk by 12% from the peak in 2009 and its passenger carried shrunk by 2% from the peak in 2007. SIA is clearly not a growth story and the investment objective is a play on the low fuel price environment and to cash in on dividends.

Technical Analysis
Daily Chart
We cut our FY16-18 earnings by 4.8%/6.4%/6.3% as we impute lower load factor to reflect current trends. Our target price has been revised down to SGD11.85 (from SGD12.40) based on 1.0x FY17 P/BV, and the stock remains a HOLD. (Read Report)

Read Related Report
Singapore Airlines - Maintain Sell Rating – Revising Down Earnings and TP Following 1QFY16 Results Analyst Briefing
Monday, 3 August 2015
- Citi Research

Source : Maybank Kim Eng Research

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