Singapore Airlines - The Cheap Ticket to SATS

Since the proposed divestment of SATS as a dividend in specie of 730 SATS shares for every 1,000 SIA shares held, SATS shares have surged by S$0.66, or 44%. This translates to S$0.48 per SIA share. Since then, SIA’s own share price has improved by 15% or S$1.70, based both on this factor as well as an improved fundamental outlook. However, we still see further upside to SIA’s share price, as SATS still remain undervalued, and the core airlines business looks to have bottomed out.

We have recently raised our target price on SATS to S$2.51, which translates to S$1.83 per SIA share. We remain sanguine on SATS prospects post the SFI acquisition, with other potential opportunities such as contracts for the integrated resorts, as well as unlocking value from properties held at cost. SIA remains an excellent proxy to get into SATS.

The current effective return for SATS as an in specie dividend is S$1.53 per share or 11.5%. This compares favourably to the expected EPS erosion to SIA of 11.5cts per share, based on our forecasts, while NTA will drop by S$1.4bn, or S$0.63 per share. Notably, SATS currently trades at 2.4x book, versus SIA's current PBR of 1.1x – this variance underscores our view of SIA as an excellent proxy into SATS.

Shareholder approval for the SATS distribution is pending, but we believe this is forthcoming. Assuming approval, the primary risk is the adjustment to SIA's share price when the distribution goes ex-rights. However, we believe that NTA erosion of just S$0.63 per share should limit downside.

We are raising our target price for SIA to S$14.70, based on 1.2x price to book on the back of improving fundamentals. Recent load factors show signs of a bottoming out, while SIA’s adjustment of capacity to match demand will yield costs savings. Despite the recent rise in jet fuel prices to US$76 per barrel, this is still below our full year assumption of US$90.

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