SIA - Good July numbers indicate bottoming cycle and recovery signs

Operating environment remains difficult, and we have cut SIA’s earnings estimates on higher fuel price, cost and lower yields assumptions. That said, good July numbers (strong +12% passenger traffic MoM growth with load factor up to 80%) indicated that cycle has already bottomed and we are seeing some recovery in demand. SIA remains a quality play with attractive valuations.

We expect SIA to make a break-even FY10 profit of S$109 mn (from profit of S$250 mn) and cut FY11 and FY12 earnings by 12- 19%. SIA could still slip to a FY10 loss given the thin profit, and its sensitiveness towards yield/traffic/fuel price.

SIA is on 1.1x forward P/B and 5.9x EV/EBITDAR, almost one standard deviations below its related historical average. Our new ex-SATS target price of S$14.0 (S$15.64 previously) implies target P/B of 1.2x (unchanged), the mid-point between the historical average and one standard deviation below. We think positive news flow going forward – improving demand and yields – will be the key catalysts, and the stock can potentially overshoot our target price.