Hold | Target price: SGD10.32

2Q / 1HFY3/13 results disappointing. SIA recorded 1HFY3/13 PATMI of SGD168m that was just above 30% of ours and consensus’ full-year estimates, disappointing the street. 2QFY3/13 PATMI of SGD90m was a 54% decline (-SGD104m) YoY affected by non-operating items and poorer operating profit. 2QFY3/13 operating profit was tainted by SIA Cargo’s operating loss tripling YoY to SGD50m. We maintain our HOLD call on SIA, premised on a challenging aviation sector outlook especially for full-service carriers like SIA where promotional fares continue to depress yields and fuel prices remain at elevated levels.

Depressed cargo segment calls for parked freighter. SIA stated that the air cargo market remains badly depressed, where freight rates have declined to a level which challenges the viability of certain flights. Hence, the company has decided to remove one of its 13 freighters from service from Jan 2013 to May 2014 to rationalise capacity. Despite this move to stem the bleeding, we still see Cargo as a segment of weakness in the near-term for SIA.

Passenger segments uninspiring. SIA’s long-haul segment load factor of 79.8% was exactly at break-even, while SilkAir’s load factor of 72.5% was more positive at 1.2ppts above its break-even (71.3%). Both passenger segments combined to show a marginal 1% improvement in operating profit YoY. More disconcerting was the fact that long-haul passenger yields at SG11.4cts/pkm were the lowest in more than two years, last seen only during the GFC-hit year of FY3/10. Promotional fares to stimulate demand will continue to depress yields going forward.

Outlook remains challenging, maintain HOLD. SIA's disappointing 2Q & 1HFY3/13 results form the basis for reducing our FY3/13-15 earnings estimates by 10-15%. We now base its valuation on 0.9x FY3/14 Book Value (1 SD below mean) to account for the increasingly challenging outlook. Catalysts to upgrade the stock would include the ending of promotional fares and fuel prices sustained below USD120/bbl, both of which look an unlikely proposition in the near-term.

Source: Maybank Kim Eng Research - 06 Nov 2012