Thursday, June 7, 2012

SIA

SIA: Deutsche had a conversation with mgt. House maintains Sell with $8.65 TP. House note that overall cautious tone remains as operating environment is difficult. Key takeaways: 1) Even though forward bookings look positive, downward yield pressures are significant. Intense competition necessitates promotional activities which pressure ticket prices. 2) Aggressive promotions required in European routes in particular. North Asia doing better. 3) Passenger traffic in April 2012 was up 9.8% yoy but this was because of a low base in 2011 (Japan earthquake and tsunami). One should not read positively into this number. 4) Airline continues to hope for a cargo pickup in 2H but have not seen any signs of it yet. 5) If operating environment continues to be difficult, the company will likely hold onto cash, as opposed to distributing a large dividend. 6) Low cost subsidiary Scoot just launched its maiden flight this month, but house do not expect material contribution/drag to earnings over next two years from this subsidiary. Overall, house note expect poor June 2012 qtr earnings will be a key negative and will not be surprised if the airline reports another loss. (SIA had a net loss of S$38m in the March 2012 quarter) Other airlines in the region like Cathay Pacific and Qantas also warn of weakening yields and have issued profit warnings. SIA is trading at 0.95x FY13 P/B which does not look attractive In the regional airlines universe, suggest investors buy China Eastern Air (Buy, HK$2.27, TP HK$3.70) and China Southern Air (Buy, HK $3.48, TP HK$4.80) instead. Both are trading at a cheaper 0.8x 2012E P/B and are likely to see q/q earnings recovery in 2Q12.

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