SINGAPORE AIRLINES - July ’11 Stats: Summer Demand Perks Up (DMG)

BUY

Price S$11.18

Previous S$12.23

Target S$12.23

SIA’s operation numbers for the month of July were boosted by summer travel demand, with Revenue Passenger Kilometer (RPK) growing by 9.3%, 4.5% and 3.8% m-o-m, y-o-y, and YTD respectively. While RPK improved on capacity and route optimization, the total number of passengers carried was still below the pre-global financial crisis level in 2008. On the cargo side, stockpiling activities following the recovery in Japan’s supply chain propelled air freight shipments although China’s monetary tightening measures damped shipments in the East Asia region. We maintain our FV of SGD12.23 but upgrade our call to BUY for a 9.4% upside to our FV after the heavy selldown in global equities. Our FV of SGD12.23 is premised on a P/B of 1.1x as SIA’s FY12 ROE is forecast at 3.3%.

Summer travel picks up in earnest. On the back of high seasonal passenger demand due to the summer travel period as well as optimized capacity allocation, SIA’s passenger load factor perked up to 81.6%, breaching the 80% load factor for the first time this year. RPK jumped 9.3%, 4.5% and 3.8% m-o-m, y-o-y and YTD respectively on higher seasonal demand during the summer period. On a m-o-m basis, load factor improved across all regions except the Americas although comparing the load factor against last year, only the East and West Asia regions saw an improvement, which we attribute to the capacity diversion on the Japan and Middle East routes. While RPK was better owing to capacity and route optimization, the total number of passengers carried was still below the pre-global financial crisis level in 2008. SilkAir’s operating stats continued to be impressive as market demand for West Asia remains buoyant, which cushioned the declining passenger load on the East Asia routes amid stiff competition from low cost carriers.

Cargo banking on Christmas rush. Cargo traffic grew by 4.0%, 4.5% and 5.4% m-o-m, yo-y and YTD respectively as shipment demand from the non-Asia region remains robust, which we would attribute to re-stocking by manufacturers after the earlier supply chain shock crippled manufacturers globally in recent months. Slowing air freight cargo shipments in the Asia region was likely attributed to China’s monetary policy tightening. Going forward, SIA is banking on the pre-Christmas shipment rush to bolster demand. Of late, demand has shifted from sea to air, an indication that most container shipping companies just missed the Christmas shipping season owing to the earlier global supply chain disruption sparked by Japan’s earthquake.

VALUATION AND RECOMMENDATION

Upgrade to BUY. We maintain our FV of SGD12.23 but upgrade our recommendation to BUY over the near term after the heavy selldown in global equities. We believe the downside risks at this level are limited in the near term, unless the developed economies dip into recession, which our economists see as a highly unlikely event. Furthermore, with its strong balance sheet, SIA should be able to weather the tough times as it has even in past crises never reported a loss. SIA’s average forward P/BV of 1.2x fell to a low of 0.8x during the last global financial crisis in 2009 when forward ROE was at only 1.6%. Our FV of SGD12.23 is premised on a P/B of 1.1x, noting that its FY12 ROE is forecast at 3.3%. With a decent price upside of 9.4% and a dividend yield of 2.7%, we upgrade SIA to BUY.