Maybank Kim Eng 2015-08-18: Singapore Airlines - Selloff overdone, U/G to BUY.


Selloff overdone, U/G to BUY 

  • Promising July operating statistics confirms our better 2H15 theory. 
  • Passenger traffic doing well, whilst cargo is still depressed. 
  • 1-year forward P/BV very attractive at 0.89x, well below its long-term mean of 0.97x. Upgrade to BUY. 

What’s New 

  • SIA’s July operating statistics for passenger traffic was impressive and substantially better than any monthly performance seen YTD. Cargo continues to suffer from overcapacity in the market and this has impacted loads and yields. 
  • Overall, the Group’s capacity growth was flat, but traffic grew by 3.5% YoY and the load factor by 2.8ppt to 84.1%. This is the best July load factor since 2007. 

What’s Our View 

  • We believe that the better load factor performance is primarily driven by lower yields, as indicated by the management in its recent 1QFY16 analyst briefing. But we take respite that this strategy is successfully gathering higher traffic flow and that SIA products are always desirable if the price is right. 
  • SIA is now trading at 1-year forward P/BV of 0.89x, which is well below its long-term mean of 0.97x and close to one standard deviation below its mean of 0.84x. 
  • We think such valuations are not justified for a company that will deliver good earnings growth and strong cash flows going forward. 
  • We upgrade the stock to BUY (from HOLD) as the recent share price decline and cheap valuation has raised the stock’s appeal. Our TP is unchanged at SGD11.85 based on 1.0x FY17 P/BV.

Mohshin Aziz | http://www.maybank-ke.com.sg/ Maybank KE 2015-08-18
BUY Upgrade HOLD 11.85 Same 11.85