Operationally, passenger yields were weak at 10.2 for 1Q10 versus 12.4 in 1Q09 and 11.9 in 4Q09, but not unexpected in view of economic conditions and the H1N1 effect. Cargo yields plummeted to 27.2, versus 40.6 in 1Q09 and 29.5 in 4Q09. Overall unit costs were contained at 54.1cts/ctk, versus 55.4 in 1Q09 and 56.5 in 4Q09. We anticipate costs to come down further as SIA adjusts capacity to match loads.
SIA also recorded a fuel hedging loss of S$287m, having bought around half of its 1Q10 requirements at US$120-130 per barrel. Despite this, fuel costs were still down by 22% sequentially, while capacity was cut by just 6%. This indicates a respite from fuel prices. Going forward, we expect fuel costs to come down significantly as most of the fuel hedged at higher costs would have been expensed in 1Q10. We estimate that SIA expensed fuel at over US$95 per barrel in 1Q10, versus the current spot rate of US$72.
We are cutting our FY10 forecast to S$451.5m, closer to management’s warning that continued adverse business conditions could potential cause a full year loss. However, we reiterate that FY10’s weak earnings are already expected and priced in by the market. We are leaving our FY11 and FY12 forecasts relatively unchanged at a profit of S$1.3bn and S$1.5bn respectively, reflecting an expectation of a strong rebound. We maintain our Buy call with target of S$14.70 based on 1.2x PBR.
Shareholder approval for the SATS distribution in specie will be sought at today’s AGM/EGM, and we believe this is forthcoming, with payout expected in early September. At current prices, this translates to S$1.56 per SIA share. Assuming approval, the primary risk is the adjustment to SIA's share price when the distribution goes ex-rights. We believe that NTA erosion of just S$0.63 per share should limit downside.
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