Singapore Airlines - OCBC Investment 2016-04-11: Committed to interest in Virgin Australia

Singapore Airlines - OCBC Investment 2016-04-11: Committed to interest in Virgin Australia SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines: Committed to interest in Virgin Australia 

  • Air NZ looking to exit VAH 
  • SIA increased stake in VAH 
  • Australasia a key market for SIA 

Air NZ may sell its stake in VAH 

  • Earlier last month, Virgin Australia (VAH) started its review of capital structure and as an initial step, it secured a new 12-month A$425m loan facility with its four major shareholders including Air New Zealand (Air NZ, 25.9%) and Singapore Airlines (SIA, 23.1%). 
  • However, Air NZ announced late last month that it is now considering partial or full exit from its investment in VAH, currently valued at ~A$338m (7 Apr close). 
  • SIA also subsequently stated that it is committed to providing its proportion of the shareholder loan to VAH. 
  • Over the past five years, VAH has transformed from being a pure low-cost carrier to become a more diversified carrier, competing in the same space as the established full service carrier, Qantas, which is also a fierce rival of SIA on inbound and outbound routes from Australia and New Zealand. 

SIA showing commitment by increasing stake in VAH 

  • More recently, SIA increased its stake in VAH from 22.9% to 23.1% through a series of equity swaps, done at a premium to the open market price. While the increase in stake is only 0.2%, we believe the key inference one should draw from these transactions is SIA showing its commitment in its interest in VAH. 
  • Apart from Europe, Australasia is another key market of SIA, and a majority stake in VAH may help SIA compete more effectively with the existing dominant player – Qantas. Therefore, we do not rule out the possibility of SIA buying over Air NZ’s stake in VAH, but such action will trigger a takeover bid (based on ASX rules). 
  • In our view, gaining control of VAH could lift SIA’s competitiveness in the Australasia market with a larger presence and network synergy with the main group. 
  • All said, with nothing confirmed, such possibility remains a speculative view but investors may want to monitor for further corporate actions ahead. 

Reiterate BUY 

  • In our view, the near-term focus for SIA continues to hinge on earnings recovery resulting from cheap jet fuel and a beneficial hedging position for at least FY17. 
  • Keeping our forecasts unchanged for now, we reiterate BUY on SIA with the same FV of S$12.50. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-04-11
OCBC Securities SGX Stock Analyst Report BUY Maintain BUY 12.50 Same 12.50