Singapore Airlines (DBSVickers)

BUY S$14.71

STI : 3,189.85

Price Target : 12-Month S$ 17.00

1Q12 results weak and below expectations but worst should be over

A weak set of 1Q12 results....below expectations

SIA reported 1Q FYE Mar '12 earnings that were weak and below expectations. Net profit declined 82% yoy to S$45m versus our expectation of S$150m as the yield improvement that we expected was not as strong as we projected. This is likely due to promotional fares to boost demand on the weak Japan routes. Revenue grew by 3% yoy to S$3,578m on 3.5% yoy growth in RPK but net fuel cost rose by 27% yoy. Load factor fell by 2.7ppt yoy, due to weakness on Japan routes arising from the Japan nuclear crisis. Hence, the Group's core passenger airline business slipped into an operating loss of S$36m versus a profit of S$136m a year ago. SIA Cargo also registered losses of S$14m against a S$60m gain a year ago.

... but outlook should improve

We expect sequential results to improve as 1) load factors start to firm up. Passenger load factor was 75.6% in 1QFY12 although this can be broken down into 74.6% for April, 73.6% in May and 78.8% in June. We have seen load factor already showing improvement as capacity has been adjusted post the Japan crisis while demand gradually returns. SIA has moderated down capacity growth to 5% this year, as opposed to 6% growth in capacity announced 3 months ago. These adjustments to capacity are made to help boost load factors.

2) We expect fuel surcharges to fully kick-in to help offset higher fuel costs. This should be the worst quarter for SIA in FY12 in terms of earnings.

Earnings to be reviewed following analysts’ briefing on Monday morning, TP under review

We will review our earnings (expect FY12 numbers to be lowered) after the analysts’ briefing on Monday but expect to maintain our BUY call. Post the S$1.20 dividend (ex on 2nd Aug), SIA will still be in a strong net cash position of over S$4bn (with potential for further capital efficiency improvement moves) and we like its recent moves to be more aggressive in Australia (via the tie-up with Virgin Australia) and in the LCC segment (with the setting up of a low fare, mid and long haul carrier). SIA also has a 49% stake in Virgin Atlantic, the value of it could be unlocked if sold.