SIA

SIA: The International Air Transport Association (IATA) has revised upward its 2013 profit forecast for the global airline industry because of stronger than expected growth in both passenger and cargo markets. IATA now expects airlines to produce a combined net post-tax profit margin of 1.6% this year with a net post-tax profit of US$10.6 b. That is up from its Dec forecast of a 1.3% profit margin and a post-tax profit of US$8.4b. Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again. Stronger revenues (US$671b, up US$12 b from the Dec outlook) are the main driver of the slightly improved financial performance. Cargo demand is expected to grow by 2.7%, reversing the declining trend of the last two years, while passenger demand is forecast to grow by 5.4%, up from the 4.5% increase projected in Dec. On the down side, fuel costs are increasing and are now expected to average US$130/bbl for the year. That will increase the industry's projected fuel bill to US$216 b in 2013, a US$6b increase over Dec's projection. Asian-Pacific airlines are expected to see their net profits rise to US$4.2 b in 2013, up from US$3.2b in the Dec projection. The improved earnings outlook is positive for SIA, which at 1.0x P/B, reflects valuations closer to cyclical lows. In fact JPM last wk kept its Overweight rating on the stock, noting that the market tends to underestimate SIA’s total potential return. Sees potential upside from capital mgt in May ’13. ie. if SIA pays out one-third of its current net cash balance or $1.06 DPS, yield would be c.10%. Alternatively it could partially divest its stake in SIA Engg via a div in specie.