Singapore Airlines - Not much to look forward to (DBSV)

HOLD S$10.55 STI : 2,717.20

Price Target : 12-Month S$ 10.00 (Prev S$ 11.20)

Reason for Report : Comparison vs 2008/09 crisis

Potential Catalyst: Stronger than expected demand or yields

DBSV vs Consensus: We have reduced our FY12F/13F earnings, which are now roughly line with consensus

• Demand outlook muted as economic woes continue to plague the US and Europe

• FY12 and FY13 earnings cut by 15% and 19% as we lower our yield assumptions

• SIA to remain profitable but only at 5% ROE; balance sheet firm with c.S$3.30 net cash per share

• Maintain HOLD, TP lowered to S$10 (0.9x P/B).

Outlook dimmed by US and Euro zone. With the US expected to continue to register sub-par growth and the Europe region mired in uncertainty, we expect demand from these areas to remain weak. As these two regions account for over 40% of SIA’s passenger business, we project SIA’s carriage growth to be in the low single digit region for the next few quarters.

Unexciting yields on muted demand. Whilst we project the demand-supply mismatch to improve as SIA slows its capacity expansion, and hence for load factors to remain stable, yield recovery has stalled in the last two quarters as demand slackened. We expect SIA’s passenger yield to flatten out for the next 2 quarters before gradually improving in FY13. Factoring in lower yields on account of the uncertain outlook for the US and Euro zone, we cut FY12 and FY13 net profit forecasts by 15% and 19% to S$583m and S$726m respectively.

Plus point is SIA’s strong cash position. SIA’s balance sheet is firm with net cash of c. S$3.30 as at the end of Sep 2011. Whilst the possibility of a special cash payout is diminished as earnings are expected to head lower, the cash should help shore up its share price.

Maintain HOLD, TP cut to S$10.00 Our TP of S$10.00 is based on our current forecasts, which is predicated on our base case scenario of sub-par US growth (2.5% GDP growth for FY12F) and zero growth for the Euro zone. However, if the demand environment worsens significantly, SIA could trade down to -2 standard deviations or about 0.77x P/B, translating to c. S$8.50.