Singapore Airlines - Tepid outlook (DBSV)

HOLD S$11.29 STI : 2,810.04 (downgrade from BUY)

Price Target : 12-Month S$ 11.20 (Prev S$ 15.00)

Reason for Report : 1HFY12 Results

Potential Catalyst: Improvement in operating numbers

DBSV vs Consensus: We have now cut our forecasts to be slightly below consensus.

• 2Q net profit of S$194m up by over three fold q-oq but dives 49% y-o-y – below expectations

• Advance bookings showing weakness, especially in US and Europe

• FY12F/13F earnings cut by 27%/17%

• Downgrade to HOLD, TP cut to S$11.20

2Q12 earnings disappoint. SIA’s 2Q12 EBIT declined 64% y-o-y to S$123m despite a modest 2% increase in revenue to S$3.7bn, as fuel costs rose 29%. However, due to higher non-operating income of S$53m vs S$18m a year ago, net profit posted a smaller decline of 49% to S$194m. For 1H12, net profit declined 62% yo- y to S$239m. An interim dividend of 10Scts was declared (1H11: 20Scts)

FY12F and FY13F earnings cut by 27% and 17% respectively, on lower yield assumptions. With the US and Europe economies still mired in uncertainty, yields are likely to remain under pressure as demand remains weak. We lower our passenger yield assumptions for SIA from 12.3Scts in FY12F and 12.5Scts in FY13F to 12Scts and 12.3Scts respectively. This is still marginally higher than 11.9Scts yield in FY11, though. Accordingly, FY12F and FY13F earnings are cut by 27% and 17% to S$685m and S$893m respectively.

The Group’s balance sheet remains strong with net cash of c. S$4bn or over c. S$3.30 per share.

Downgrade to HOLD, TP cut to S$11.20. With our cut in earnings forecasts for SIA, we lower our target P/B valuation multiple for SIA to 1x P/B, against FY13F ROE of 6.7%. A stronger growth outlook for the US and Europe could be a catalyst for the stock to re-rate.