SIA - Better Luck Next Time?

The Asian Wall Street Journal yesterday quoted MM Lee as saying “talk may resume between SIA and China Eastern (CEA)”. SIA’s CEO Chew Choon Seng (CCS) was quoted by BT as saying “in the longer tem, we are still interested in any industry consolidation and in any investment opportunity in China, India or any growth market”. (MM Lee and CCS were in Kl attending a IATA function.)

Looking at SIA’s price movement yesterday (up 56 cents to $13.34 on a down day), it is clear investors liked the story of SIA going after CEA, and why not?

CEA was an eager bride 2 years ago, until Air China killed the deal with support from Cathay Pacific. Under that deal, SIA and Temasek were to acquire a combined 24% stake at HK$3.80 per CEA share. The surge in CEA’s share price to HK$10.50 in September of that year had also made it difficult to cement the alliance. The deal was called off in Jan ’08, as it failed to secure shareholders approval at an EGM.

With CEA last at HK$1.74 before trading halt (for the merger with Shanghai Airlines, which will give the combined group a 50% share of the Shanghai aviation market), another attempt to get together will likely be even more welcomed by investors. Shanghai will hold the World Expo next year.

SIA first confirmed interest in CEA in May ’07, when its stock was at $17.70; it hit $20.20 in October of that year. And when CEA’s EGM failed to approve the deal, SIA had fallen to $16.90.

SIA’s resilience amidst all the caution or more aptly, bearishness surrounding the airline sector (IATA hasraised the estimated loss this year for the global airline industry to US$9 bln from US$4.7 mln made in March this year), suggests that our Neutral stance merits re-consideration. A correction of the general market that many believe is now in progress, will likely provide such an opportunity.

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Singapore Airlines: Resuming Talks with China Eastern?

A Bloomberg report said Singapore Airlines (SIA) and China Eastern Airlines Corp. may start talking again after an investment from the Singapore carrier failed last year, citing the South China Morning Post which quoted Singapore Minister Mentor Lee Kuan Yew. However, SIA Chief Executive Officer Chew Choon Seng, speaking at the same gathering, said the comments were Lee's ``personal view'. He also added the company is only keen on acquisitions in China in the longer term, when the regulatory environment is proper.

A quick recap. In 2007, SIA, along with majority shareholder Temasek, offered US$920m (SG$1.34bn) for a combined 24% stake in China Eastern, but the Chinese carrier's shareholders rejected the bid, which also faced strong opposition from rival Air China.

Not likely at this juncture. Putting aside the CEO’s comments, our first impression of the talks at this stage is that these are highly unlikely to have taken place given the fact that shares in China Eastern Airlines and its smaller rival, Shanghai Airlines, were suspended this week after media reports said the two loss-making carriers were close to a merger deal. The combination of the two China carriers would potentially give the new group a 50% market share in Shanghai. Given the challenging environment, we think the enlarged group may take a while to realise any merger synergies before looking at other possibilities.

More on longer term plan. While not upbeat on the possible revival of talk between SIA and China Eastern, we believe the company is still keen on acquisitions in China and India in the longer run. Especially with Singapore Minister Mentor, Lee Kuan Yew expressed its bullishness of both countries particular that China likely to achieve a GDP growth above 6% during the Special Session organised by International Air Transport Association (IATA).

Reiterate SELL. With IATA having recently revised its 2009 forecast for industry losses to US$9bn from the March 2009 estimate of US$4.7bn, industry players also mostly expecting more turbulence ahead and the latest news do not have any fundamental impact on SIA. Thus we maintain our SELL recommendation on the company. Our fair value of SG$8.80 is derived from 0.68x FY10 book, or a -2 standard deviation from its historical trading band plus the SATS share entitlement.

City Developments: South Beach Project Secures S$1.2b Refinancing

South Beach Consortium secures S$1.2b refinancing. The South Beach Consortium (SBC), equally owned by City Developments (CDL), Istithmar and El-Ad, has secured an S$800m syndicated 2-yr bank loan and S$400m 5-yr convertible notes. Both loans are secured loans and will refinance the S$1.2b bridge loan (Jun 09 expiry) for buying the South Beach Project land parcel in Sep 07. DBS, OCBC, UOB, HSBC and Sumitomo Mitsui are the syndicated loan’s providers, while CDL and Hong Kong property developer Nan Fung Group will subscribe for S$195m and S$205m of the convertible notes respectively. Interest cost was not revealed, but we estimate all-in margin to range from 3.0 – 3.5%, based on REITs’ recent debt refinancing exercises.

Refinancing risks removed, but concerns remain over two foreign partners. The refinancing of another substantial loan (after Suntec REIT: S$825m, CDLHT: S$350m and CCT: S$160m) further indicates that credit markets have eased, which is good news for the real estate sector. While we view the refinancing exercise and introduction of a new established foreign investor positively for CDL, concerns remain over the possible exit of Istithmar and El-Ad. Earlier this year, Istithmar was reported to be looking at offloading assets to generate cash for its parent – Dubai World to help pay its debts. During 2H08, El-Ad had also deferred the construction of Plaza casino-Hotel in Las Vegas and deferred payment of an S$625m loan used to buy its land. To date, both companies have yet to provide clear indication of their financial status and priority of projects under their portfolio.

Minimal impact, reiterate BUY on CDL. Net gearing of CDL would only inch up to 0.49x (currently 0.47x) upon subscription of the S$195m convertible notes, which is still healthy in our view. CDL’s 33% stake equates to S$0.15 per share (assuming project completes by end-2016), accounting for only 1.5% of our S$10.28 base case RNAV. We continue to favour developers with sizeable Singapore residential exposure. Reiterate BUY on CDL at S$12.34, pegged at 20% premium to base case RNAV.