Singapore Airlines: September 11 Stats: Hanging on in There (DMG)

(BUY, S$11.29, TP S$12.23)

SIA’s revenue passenger kilometer (RPK) in September grew 4.7% y-o-y, while the load factor improved by 3% m-o-m to 79.6% owing to capacity cuts on its medium- to long-haul flights. On the cargo division, we have been harping on the issue that it will benefit from demand for urgent air freight shipments, following the global supply chain disruption caused by the Japanese earthquake and tsunami. While the numbers have yet to show evidence of such demand, we foresee that the shipment rush would kick-in over the next two months. We believe the downside risks on the share price at this level are limited in the near term, unless the developed economies dip into recession. With a decent price upside of 8.3% and a dividend yield of 2.7%, we maintain BUY on SIA at an unchanged FV of SGD12.23.

Cutting capacity. RPK for the month of September grew by 4.7% y-o-y (1.4% m-o-m, 3.8% YTD) while the load factor increased by 3% m-o-m to 79.6% (down by 0.7% y-o-y and 1.9% YTD)) owing to the capacity cuts (which includes frequencies) on its medium- to long-haul flights. Likewise, Silk Air also saw capacity cuts compared to the previous month, although this was not done aggressively considering their encouraging growth in passenger numbers (RPK up by 1.2% m-o-m, and 12.6% y-o-y). Save for West Asia and Africa which saw stronger loads on the Indian subcontinent flights, all other regions reported weaker load factors, particularly the developed economies.

Cargo yet to see any rush in urgent deliveries. SIA’s cargo side saw its freight tonnage kilometer coming in flat at a marginal 0.1% m-o-m growth despite progressively toning down its capacity. We believe that the cargo division will benefit from demand for urgent air freight shipments, following the global supply chain disruption caused by the Japanese earthquake and tsunami. While the numbers have yet to show evidence of such demand, we foresee that the shipment rush would kick-in over the next two months.

Maintain BUY. We maintain our FV of SGD12.23 with a BUY call. Since our BUY call back in August, the counter has been performing relatively better than the STI, outperforming in both absolute and relative terms by 1.2% (benchmark at -1.9%) and 3% respectively. 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 highly unlikely. Furthermore, with its strong balance sheet, SIA should be able to weather the tough times as it has never, even during past crises, reported a full year loss. SIA’s average forward P/BV of 1.2x fell to a low of 0.8x during the last global financial crisis when its forward ROE for 2009 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 8.3% and a dividend yield of 2.7%, we maintain BUY on SIA at a FV of SGD12.23.