SIA - May passenger loads plummet on H1N1 concerns

Singapore Airlines (SIA) posted a sharp drop in passenger traffic, down 22.8% YoY for the month of May. This was at the height of concerns over the H1N1 swine flu pandemic, which saw discretionary travel affected. As a result, passenger load factors fell by 7.8 ppts YoY to 66.9, despite SIA’s planned passenger capacity cutback of 13.9% to mitigate lower demand from the weak global economy.

Cargo posted a load factor of 61.2, on the back of a 20.7% reduction in loads, matched by a 21.4% drop in capacity, to actually post a YoY improvement of 0.5 ppts. While cargo numbers continue to look weak, they indicate that the business may have bottomed out, with a consecutive improvement of 2.1% in cargo carried.

We believe that the worse of the H1N1 flu scare may be over, as air travel returns to non-crisis conditions. As of June 10, 2009, the World Health Organization (WHO) stated that 74 countries have officially reported 27,737 cases of H1N1 infection, which included 141 deaths. Despite the WHO officially declaring the outbreak to be a "pandemic" on June 11, it has stressed that the designation was a result of the global spread of the virus, and not its severity. The fatality rate is estimated at 0.4%, which is down sharply from when the virus first surfaced, as medical authorities have learnt to contain its spread and provide treatment.

For passenger traffic, we therefore expect June loads to show some improvement, not only on the back receding H1N1 fears, but also due to June school holiday demand, as well as moderate improvement of economic conditions. A recent check of SIA’s airfares on its website also indicates a lower level of discounting, with special offers of airfares to high traffic destinations such as Hong Kong, Sydney and London discontinued. While this may not entirely indicate that SIA is out of the woods, and that the situation remains very fluid, we believe that the signs are encouraging.

We are leaving our full year load factor and yield assumptions unchanged, and maintaining our FY10 earnings forecasts at S$865m. This implies that we expect SIA to post a fairly decent profit, mainly due to reduced overheads, such as jet fuel. We also maintain our Buy call on SIA, with a target price of S$13.20, based on 1.1x book value. Despite weak business conditions, SIA is well equipped to weather the downturn, and investors continue to recognise the quality of this blue chip investment.

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F&N - A Respite

F&N and Coco Cola have jointly agreed to extend their business relationships till Sept 30 th 2011, reaffirming our earlier concern that breaking up is a lose-lose situation, especially for F&N, as it would mean F&N having to build its own bottling plants and distribution facilities for the small Singapore and Brunei markets. (F&N Bhd can take care of the Malaysian market with its existing facilities.)

Although the problem has merely been deferred, there is nothing to say the new arrangement cannot further be extended come Sept 30th 2011.

The current bottling arrangements in Malaysia, Singapore and Brunei were to have expired on Jan 26th 2010, news of which had negatively affected the stock, and basis for our BUY recommendation then. After a strong recovery, which saw F&N share price cross $4, we believe it would have factored in the good response to its residential projects (8 @ Woodleigh and Woodsville 28, which were sold out in recent 2 weeks.)

We would therefore downgrade the stock to Take Profit.

Parkway Holdings - Improved Singapore patient load in April

The group’s Singapore hospital operations are seeing improved patient demand with inpatient growth improving in April compared to the contraction seen in the first quarter. Occupation grew from 58% in the 1Q to 62% in April. With more inpatient and surgical procedures, revenue intensity was also stronger. However, outpatient growth, which was strong in the first quarter, saw some pullback.

The launch of its fixed-priced packages has met with encouraging response, with 250 packages sold in the first month since it was launched. Management attributed the progress in in-patient growth to increased demand from local patients since the public sector experienced capacity constraints. Management also highlighted that the recent decision to raise the limits on the use of Medisave for surgical procedures will likely help increase demand for private healthcare in Singapore.

As the group develops its new Novena hospital, there is a plan to designate its hospitals by speciality. For example, Gleneagles could focus on liver transplant, women and child and ophthalmology. Mount Elizabeth could focus on oncology while the new Novena Hospital could focus on cardiology. Meanwhile, the group continues to strengthen its pool of specialists with a group of doctors from the US looking to start up in October 2009. In addition, some specialists from the public sector seem to be looking to start their practice at Parkway hospitals.

The group is awaiting the building plan approval for the Novena Hospital and may look to market the medical suites by the end of the year. Management hopes to award the construction contract by the thirdquarter and save up to S$100mn in construction costs due to lower material prices. The group is looking to market the Novena medical suites to doctors, who currently do not own their medical suites. Parkway is looking to sell the first phase, with 88 units out of a total 200 units (200,000sf).

The group is actively looking to manage costs, eg, the group is expected to save S$5.5mn from wage restructuring, S$10mn from bulk purchasing and another S$5mn from general cost-saving initiatives over the next two years.

New private cancer hospital to open in 2011F. Pacific Healthcare, a listed specialist clinic chain in Singapore, has recently announced its plan to redevelop the Adam Road Hospital site into a private cancer hospital to be opened in 2011F. This S$42mn investment reaffirms our positive sector view on robust demand for private healthcare in Singapore even in the current recession. The key demand drivers include: 1) rising affluence of local population, 2) tight capacity at public hospitals, and 3) medical travel.

Raising price target to S$2.14/share, suggesting 34% potential upside. Since our initiation on 3 March 2009, Parkway’s share price has increased 52% (vs a 48% increase in the STI Index over the same period), on the back of improved market sentiments and a strong 1Q09 result. We are raising our price target from S$1.85 to S$2.14 by increasing our target earnings multiple for the overseas operations to 16x FY10E (from 13x FY09E) to reflect its strong growth and by updating our marked-to- market valuation of Parkway Life REIT. We believe the next re-rating catalyst will be the impending sale of the Novena medical suites, which may surprise positively given the recent buoyant property market.