SIA Sale of its stake in Virgin Atlantic

Company Overview
The Singapore Airlines (SIA) Group comprises 3 main business segments: passenger, cargo and aviation MRO services. The parent company, SIA, operates more than 100 aircrafts to a global network of destinations.

 Sale of its stake in Virgin Atlantic to Delta Airlines for US$360mn
 Value of the stake is within market expectations
 Our net cash forecast would be increased by S$0.37 to S$4.13/shr by the end of FY13E
 Maintain Buy with TP of S$13.40

What is the news?
SIA announced that it had entered into a conditional share purchase agreement with Delta Airlines to sell its 49% stake in Virgin Atlantic Ltd (VAL). The aggregate consideration for the sale is US$360mn (c.S$439mn) and is expected to be completed in 4QFY13. As of 31 Mar 12, the carrying value of SIA’s investment in VAL had been fully written off. Assuming that the sale had completed on 1 April 2012, 1HFY13 basic EPS would be increased by S$0.27.

How do we view this?
The sale of SIA’s stake in VAL would unlock hidden value in the company. While the
US$360mn sales price was significantly lower than the price paid by SIA in 2000, it is well within recent market estimates of US$300mn to US$500mn. The cash proceed from the sale is worth S$0.37/shr and would lift our net cash forecasts for SIA to S$4.13/shr by the end of FY13E. While SIA is likely to continue hoarding cash in view of the challenging operating climate, we expect part of the proceeds to be returned to shareholders in the form of a special dividend. We have not made adjustments to our earnings forecasts, but expect to increase our conservative final DPS estimate of S$0.10/shr.

Investment Actions?
We expect news of this divestment to catalyze the stock of SIA and believe that markets would focus on potential cash distributions to shareholders. Maintain Buy with TP of S$13.40.