Singapore Airlines - Cloudy skies are behind (DBSVickers)

BUY S$12.24 STI : 3,130.34

Price Target : 12-Month S$ 15.00 (Prev S$ 16.20 Ex-Div)

Reason for Report : Change in earnings estimates and TP.

Potential Catalyst: Stronger demand, load factors or yields.

DBSV vs Consensus: We are 8% above consensus for FY12 on stronger sequential earnings recovery

• Expect stronger quarters ahead

• Still in net cash of S$4bn ex-div, with potential for more value enhancing moves

• Pro-active moves to regain market share

• Maintain BUY, our TP is adjusted to S$15 (1.3x FY12/13 P/BV) from S$16.20 previously

1Q earnings weak but expect better ahead. 1QFY12 PATMI of S$45m came in below our forecast of S$150m, as yield improvement was slower than expected amid the strong S$. Still, 1Q is seasonally the weakest for SIA and we are expecting stronger quarters ahead on sequentially higher load factors and yields. Adjusting for weak 1Q numbers and lower capacity growth for FY12, we cut our FY12 and 13 forecasts by 23% and 16% to S$934m and S$1,070m respectively.

Firm balance sheet and growth initiatives are also positives. We like SIA’s moves to gain more market share in both its traditional network carrier segment as well as a fresh venture in the LCC market. This includes a tie-up with Virgin Australia (VA) to allow SIA access to VA’s 30+ destinations in Oceania as well as the setting up of an independently branded and managed mid-to-long haul low cost carrier within a year.

With c.S$3.30 net cash per share after paying out the final dividend of S$1.20, SIA remains in a strong financial position to further enhance shareholder value, by a) returning excess cash, b) paying out a consistently high level of dividends or c) making value accretive acquisitions.

Maintain BUY. Our 12-month target price for SIA is adjusted to S$15 as we lower our P/BV multiple from 1.4x to 1.3x to account for the lower ROE (on lower earnings projections), based on blended FY12/13 estimates. Key risks would include a double-dip in the US economy or further softness in Europe or a sudden spike in fuel price.