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SIA stock analysis

Singapore Airlines (SIA SP, $11.40, BUY, TP $14.40) –

Singapore Airlines’ share price has been surprisingly resilient, trading in an upward pattern since its recent low. The stock has gained 8.5% since last Thursday, while the STI has slumped by 4.0%. Loads and traffic have remained relatively resilient, while declining oil prices could provide a significant respite to the airline’s operating costs. Share buybacks have also supported its price. While we anticipate risks to traffic, we retain our full-year forecasts for now and keep our target price at $14.40. Reiterate BUY.

Kim Eng

Singapore Airlines Limited
Initiate with BUY – Catch a safe flight
Cutthroat competition has intensified. Positioned as a
premium airline, SIA has always faced tough competition in
the aviation industry. Middle Eastern carriers, such as
Emirates, Qatar Airways and Etihad Airways, are now
competing head-on with SIA in premium air travel. Yet despite
SIA’s status as a premium airline, it is also susceptible to the
competition from rapidly growing low-cost carriers (LCCs)
around the region. To top it all, Qantas is now planning a new
Asia-based full-service carrier. Qantas is deciding between
Kuala Lumpur and Singapore as the new carrier’s base. If
Singapore is chosen as the base for this new airline, SIA will
face new competition in its core segment at its backyard.
Competition is not new to SIA. SIA has faced competition
from global legacy airlines, LCCs and Middle Eastern carriers
for years and it has emerged relatively unscathed. For example,
despite the presence of competition the Group in FY11 made
earnings of S$0.90 per share, up more than 400% from the
crisis-hit FY10. Looking back further, FY11 net earnings was
also 2.9% higher than in FY09. In addition, SIA has successfully
maintained its standing as a premium carrier and has probably
the strongest balance sheet among airlines to weather
Potential growth from new wholly-owned LCC. SIA has
not experienced much growth over the last few years. This is
most evident by a falling capital expenditure as a percentage
of sales and a rising dividend payout ratio. SIA is currently
planning the launch of a wholly-owned subsidiary LCC in May
2012. The new carrier will be operated independently and
managed separately from the flagship Singapore Airlines and
it will operate medium-to-long haul flights. This new venture
could provide the group its next leg of growth, if cannibalisation
effects can be minimised. With Singapore-based LCCs mostly
focused on short-to-medium haul flights to regional destinations,
SIA could potentially develop a new business segment with its
new LCC.
Initiate with a BUY. SIA’s share price has fallen 27% from
this year’s peak in Jan 2011, along with the rest of the aviation
sector. While the threat of recession is very real, the market
seems overly eager to price a recession into SIA’s share price.
Instead, we believe that a fairer approach is to use an adjusted
ex-net cash P/B multiple of 1.01x, or one standard deviation
below historical average, to derive a fair value of S$12.59 per
share, representing an upside of 10.5%. And we initiate
coverage on SIA with a BUY.

ocbc securities

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