Event
Singapore Airlines’ (SIA) share price has been surprisingly resilient, trading in an upward pattern since its recent low. The stock has gained 8.5% since last Thursday, while the STI has slumped by 4.0%. Loads and traffic have remained relatively resilient, while declining oil prices could provide a significant respite to the airline’s operating costs. Share buybacks have also supported its price. While we anticipate risks to traffic, we retain our full-year forecasts for now and keep our target price at $14.40. Reiterate BUY.
Our View
As we go into SIA’s busiest quarter, passenger traffic and loads year-to-date have remained steady, with monthly traffic higher by an average of 3.6% over the previous year. While its passenger load factor has slipped slightly due to capacity addition, it is still healthy at between 76% and 80%. SIA also remains committed to expansion and has placed orders for eight B777-300s and leased 15 A330s. Its order of 20 B787 Dreamliners will commence delivery in 2014. The airline also continues to recruit cabin crew.
However, we caution that SIA’s loads are at risk if we enter into a prolonged economic downturn. Its premium passenger travel is highly dependent on business from financial institutions and potential downsizing and lower budgets from this business sector may affect traffic and yields significantly.
One clear respite is lower oil prices. While the current spread between crude oil and jet fuel remains unusually high due to a product supply mismatch, the price trend is likely to be downwards. Our sensitivity analysis indicates that every US$10 reduction in the average jet fuel cost will boost net earnings by S$350m. However, the rising greenback is negative as a significant proportion of costs (including fuel) are denominated in US dollars, while the largest proportion of revenues is in Singapore dollars.
SIA has also been buying up its own shares, which has provided significant support. Since July, it has purchased 10.2m shares at $10.51-14.20 per share. Under the current buyback mandate, there is still headroom for the airline to purchase a further 49.6m shares, which can easily be funded with its S$6b cash.
Action & Recommendation
Our target price remains at $14.40, based on 1.2x P/B. The stock’s 2008 trough valuation was a P/B of 0.8x, translating to an implied floor of $9.50. We believe SIA’s balance sheet will enable it to weather the storm, as has happened several times before.
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