2. SIA Engineering(SIAEC) is strategically more important than SATS, diverstment unlikely- Not surprising, given that SIAEC is the main MRO arm of SIA and that the SIAEC will very likely benefit from future operating leases undertaken by SIA. From a financial standpoint, SIAEC now has the highest ROE(21%) among its business units and as such it would not make sense to divest the unit via scrip dividend.
3. Plans to sell 13 aircraft- 9 B777-200 and 4 B747-400s are up for sale but credit market remains tight and is deterring buyers. We have assumed that 3 B777-200s would be sold for US$140m each in FY10.
4. Forward bookings show that the rate of decline is leveling off-Management indicated that the 20% odd decline in forward booking appears to be stabalising and that is positive. They also indicated that they will be engaging in promotional activities and market directly to frequent flyers to reduce deferred revenue liability.
Our take- There are 4 key factors which will affect earnings and ratings on the company. They are :
1) extend of lower fuel expenses( we are looking at 46% decline),
2)the extend of decline in yields ( we are looking at a further 4% decline in pax yield fm 4Q09 and no change in cargo yield from 4Q09)
3)the strength of the Singapore dollar and the ability to sell aircraft.
4) The extend to which air travel will slow down in the wake of rising Influenza A virus infections . ( We have assumed a 12% decline for FY10)
We believe that SIA should continue to trade at a discount to book value ( $11.78) and the stock should be measured on a PE basis as well. At $11.80, the stock is trading at 20x our forward estimate and 21.5x consensus estimate. We rate the stock a SELL, pending adjustment of our target price.
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