SIA - Business rebound expected, maintain Buy

Singapore Airlines posted tangible improvements to its July load factors. Its passenger load factor, at 79.7, was just 1.3 points off July 2008’s figure, and was a continuing trend of improvement from June 2009’s 75.7. The pick-up came from two fronts; firstly, from SIA’s ongoing efforts to reduce capacity, where passenger seat-kms was cut by 11.8%, and from a month-on-month improvement in passenger loads by a significant 12%.

On the cargo side, there was also cause for optimism, with cargo load factors up by 3.3 points year-on-year to 63.6. However, this improvement came primarily from a sharp 18.9% reduction in capacity, while loads declined by a comparatively lower 14.6%. On a sequential basis, cargo loads did improve by 10.5%.

We warn that the resulting overall improved load factor numbers by 1.1% points to 69.7, while positive, does not give an indication of yields. Premium travel is still in the doldrums, and the improved loads may be a function of SIA’s ticket discounting in order to fill seats. However, the willingness of passengers to get on planes in view of improved economic conditions is encouraging. We also anticipate costs to come down further as SIA adjusts capacity to match loads.

Our FY10 forecast stands at S$451.5m, for a decline of 61%. However, we reiterate that FY10’s weak earnings are already expected and priced in by the market. We expect a strong rebound from FY11 onwards, and hence maintain our BUY call with target of S$14.70 based on 1.2x PBR.

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