SIA - Traffic could improve from here, but yields less so

The general feel was that there was a lack of visibility in terms of traffic trends although the rate of decline in passenger traffic appeared to have bottomed out following the initial fears of being quarantined as a result of the H1N1 flu. However, yields are unlikely to improve significantly. We have already factored in an improvement in passenger yield with full-year projection at 11.0 cents vs 10.2 cents in 1Q09, and cargo yield at 30.0 cents vs 27.2 cents in 1Q09.

Yields. Two-thirds of the fall in passenger yield was a result of lower local currency yields due to aggressive ticket price cuts for both economy and premium traffic. The balance of a third was due to lower surcharges, lower premium traffic and forex losses. Cargo yield was affected by lower rates and we sense this is unlikely to get better unless traffic improves.

Passenger traffic. Promotional ticket prices had resulted in positive response and management indicated that the fears of being quarantined appeared to have subsided as authorities have stopped contact tracing and reporting infections. We expect passenger traffic to improve in 2H09 but have revised our full-year passenger traffic growth assumption to -14% from - 12%.

Fuel hedged. SIA indicated it had not materially changed its hedging requirements and still guided for a 25% hedge for FY10 at US$125/bbl. We can infer that management expects fuel prices to remain subdued for the period or that it envisions further capacity cuts.

Fleet and capactity management. In 1Q09, SIA took delivery of two A380s and four A330-300s. SIA will take delivery of three more A380s and three more A330-300s in 2H09, boosting capacity. Management said it will consider cutting capacity if passenger traffic continues to remain weak. We expect 2Q09 to see the full impact on capacity from the six aircraft deliveries in 1Q09. Load factor as such could fall, even if traffic improves.

Cost cutting. Further cuts in staff costs will net about S$60m in savings. Is the worst over? Management was non-committal about this, but we sense SIA is now more mindful of the need to maintain competitive ticket pricing to draw in discretionary travel. No indication was provided on the outlook on cargo traffic but the improvement in June’s cargo load factor should lead to at least reduced losses for 2Q09. Overall, we do not expect a significant improvement in yields in 2H09 but breakeven load factors should improve due to lower fuel and staff costs. We estimate SIA will deliver S$360m in operating profit on margin of 3% (previously 5%).

No cash call. SIA emphasised it has no plans for cash calls and that capex can be adequately funded by internal cash flow, cash balance and, if required, by debt. The company however did not give any guidance on dividends, but we have cut our dividend assumptions for FY11 and FY12 to 30 cents/share from 40 cents and 50 cents respectively.

We cut our FY10 and FY11 net profit numbers by 33% and 11% respectively following cuts in our yield assumptions. Passenger yield for FY10 is cut from 11.4 cents to 11.0 cents.

SIA has reported two consecutive quarters of operating losses and management has even highlighted the possibility of a full-year loss. Even so, stock price remains firm, suggesting an unwillingness to sell the stock given the SATS share dividend. Still, we see no immediate catalyst for an upgrade given our take that capacity will rise further. We continue to maintain SELL and our ex-all fair price of S$9.80, implying a 16% discount to book value and an EV/2-year average EBITDA of 4.7x.

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