Singapore Airlines: Dark clouds yet to clear

Lowering FY09F earnings by 14%. SIA’s load factor fell to 71.2% in Q4, which is down by 8.2ppt y-o-y and 7.3ppt sequentially. Whilst lower fuel prices may mitigate some of this, margins would still have been squeezed substantially, which led us to lower our FY09F forecast by 14%. SIA is due to announce its full year results on 15 Mar.

Demand still weak; swine flu not helping. Meanwhile, a recovery in the global economy is not yet certain and demand for premium air travel is likely to remain weak in the coming months, which should mean continued depressed load factors for SIA. The current swine flu situation will also curtail some amount of traveling, for at least in the short term.

Dividends likely to be affected. Given the weaker 2nd half of FY09 and weak outlook ahead, we are projecting dividends to be cut to 70cts (50cts final) for FY09, and 50cts each for FY10 and FY11, compared to S$1 for FY07 and FY08. Actual dividends may even be lower as our projections represent more than 70% payout compared to less than 60% historically.

Downgrade to Fully Valued. SIA has rallied over the last week, along with the market, but we believe the stock could de-rate when the company reports weak results and if dividends disappoint. Downgrade to Fully Valued, our TP of S$11.30 is based on 5x EV/EBITDA, SIA’s average multiple over the last 5 years.

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