SIA - June loads improved but 1QFY10 losses unavoidable

Passenger demand still weak but y/y decline narrowed and loads are no longer falling off a cliff: Traffic fell 18% y/y, improving from May’s 23% decline. This was partly driven by more aggressive fare discounting. With more airlines slashing capacity, this will help to support industry loads and yields which will be positive for SIA over time. Cheap tickets are less easy to find than a few months ago based on our research. Load factor was 75.7%, -3.5ppts y/y, but much better than May and Jan-Jun’s 71% average, -7ppts y/y. This is still below breakeven as yields have fallen substantially. West Asia/Africa load factors rose 3.5ppts y/y in June while the loads in other major route regions fell 4-7ppts, with US the worst hit.

Cargo did not recover but the improvement felt by N. Asian carriers should filter through over time: Traffic fell 21% y/y, similar to May’s decline and worse than its 19% drop in Jan-Jun 09. SIA Cargo has a weaker catchment area and handles more transshipment cargo than N. Asian carriers whose traffic declined less in June. We believe the gradual recovery in cargo demand will filter through to SIA over time. Load factors have inched up, +1.3ppts y/y to 63%, vs. its 59% average, -3ppts, in Jan-Jun 09.

Buy early: SIA is in its worst earnings cycle in history and will likely report losses next month. However, we see this as an opportune time to accumulate as 1) airlines are early cyclicals and SIA has historically priced in a recovery 12M ahead, 2) premium traffic will pick up with increased economic activity and as corporates relax their travel policy, 3) Emirates’ A380 deferrals will lower competition risks, 4) SIA is the “safest” choice in the sector given its well-capitalized B/S, strong track record at managing costs, 5) more value could be unlocked from SIE, Tiger, 6) it is trading cum S$1.83 DPS, 6) mark-to-market hedging gains will bolster book value.

PT, valuation, key risks: Our ex-div Jun 2010 PT of S$14 is based on 1.2x P/BV, SIA’s average valuation since 2003 when its competitive environment intensified with the entry of low-cost carriers and Emirates’ increased presence in Singapore. Key risks: 1) WHO issues travel restrictions due to Influenza A; 2) stagflation; 3) making value-destroying investments.

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