SIA getting worse before getting better

Target price: SGD11.15

Core earnings in line, maintain HOLD. We had warned in our results preview that Singapore Airlines (SIA) would suffer from a disappointing 4Q2012, dragged down by high fuel prices and global economic headwinds. SIA’s marginal SGD 5.2 mil operating loss played out broadly in line with our expectations. A SGD 50 mil loss on a disposal of SIA’s final 747-400 aircraft brought its Net Loss for 4Q2012 to SGD 38.2 mil. FY2012 NPATMI at SGD 336 mil was a 70% decline YoY.

Yielding to competition. Passenger yields have come under pressure in 4Q2012 (-3.3% YoY) as well as FY2012 (-0.8% YoY). In the face of intense competition amongst airlines, SIA will continue promotional activities which are expected to place downward pressure on such yields especially in Europe and the US. Figure 2 shows that SIA has
almost 20% of FY2012 revenue derived from both these regions.

Fuel pushes passenger break-even loads to 78%. Fuel prices have contributed to push SIA’s break-even passenger load factors to 78% (Figure 3) in FY2012 (FY2011: 75%). Such high break-even loads are unsustainable in the long term when put in context with SIA’s 10-year historical average load factor achieved of 76.8%. Poor profitability will persist if these break-even loads are not brought down by prudent cost and yield management.

Cargo isn’t helping. SIA Cargo reported an operating loss of SGD 119 mil for FY2012, versus a SGD 151 mil profit in FY2011, suffering from a sharp 5.7 percentage point increase in break-even load factor to 67.3%. SIA expects air freight to only gradually recover possibly in the second half of the year.

Getting worse before getting better, Maintain HOLD. All these point to headwinds that will persist in the near term for the aviation sector, especially with the increasingly uncertain political environment in Europe. We maintain our HOLD call, with TP pegged at SIA’s historical mean P/B of 1.0x, but also stand by our belief that SIA remains fundamentally well positioned for a sector-wide recovery, which unfortunately, is not yet in sight.