Singapore Airlines Ltd - Weakness factored into estimates, maintain BUY (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$11.30

Fair Value: S$12.59

Comparing SIA's operating statistics with the just released IATA numbers. Singapore Airlines (SIA) saw passenger kilometres (RPK) grew 3.0% YoY and passenger capacity (ASK) increased by 5.1% YoY in August. In 8MCY11, SIA passenger kilometres were up 2.1% while passenger capacity grew 6.0%. The difference in the growth rates of passenger capacity and passenger kilometres were 2.1ppt and 3.9ppt in Aug 2011 and 8MCY11, respectively. Compared to the recently released International Air Transport Association's (IATA) global airlines' operating data for Aug 2011, SIA's faster capacity increase than load increase outstrips those of worldwide and Asia Pacific averages. This resulted in SIA's Aug 2011 passenger load factor falling to 76.6%, below both the load factors of international flights worldwide and in Asia Pacific of 81.2% and 78.9% respectively. SIA may continue to experience falling passenger load factors if 1) it continues its 5% capacity increase for the rest of FY11 and 2) the upcoming peak air travel months disappoint.

Cargo capacity was better managed, but cargo load factor continues to fall. In Aug 2011, SIA's cargo kilometres (CTK) shrank by 0.1% YoY but cargo capacity (ACTK) was up 0.2% YoY. In 8MCY11 numbers, cargo kilometres are up 3.7% while cargo capacity is up 5.0%. The difference in the growth rates of cargo capacity and cargo kilometres were 0.3ppt and 1.3ppt in Aug 2011 and 8MCY11, respectively. When compared to the IATA industry numbers, SIA has managed its cargo capacity increase much better than airlines worldwide and in Asia Pacific, which saw cargo capacity growth outpaced cargo kilometres by ~5ppt. However, as previously mentioned in our report, IATA said cargo volumes around the world have stagnated in recent months because world trade has stopped expanding. Coupled with increasing cargo capacity, cargo load factors have been on a downtrend.

Weakness factored into our estimates, maintain BUY. SIA's falling load factors in both passenger and cargo segments are expected and have previously been factored into our earnings model. Although SIA's share price has fallen 0.9% since we issued our initiation report on 28 Sep 2011, it displayed some of its defensive nature when compared to the 4.5% drop in the FTSE STI over the same period. We are maintaining our fair value estimate of S$12.59 per share, representing a potential upside of 11.4% from current level, and also maintaining our BUY rating.