Sale of Virgin stake for USD360m (SGD439m). The consideration amount of SGD439m was less than what we had expected, as we had factored in Delta’s demand for the stake for strategic and competitive reasons and didn’t expect SIA to be willing to let go of their stake for a price significantly below their acquisition cost of GBP600m. SIA stated that the investment in Virgin Atlantic has yielded limited returns since the acquisition in 2000 and the synergies originally hoped for have not materialised. We do see the jettisoning of the Virgin stake as a marginal positive given its misfit within the SIA group.

Special dividend case still cannot be ruled out. The SGD439m cash translates to ~SGD0.375/sh, or a 3.5% yield should SIA decide to pay it out in a special dividend. Our previous analysis was that should the Virgin sale attain a price of ~SGD1b, it wld make sense to pay a special dividend as it wld contribute 26% to SIA's already existing SGD3.8b net cash stockpile. With this smaller amount of SGD439m, which only comprises 11% of existing net cash, the case looks less compelling but we still cannot rule out a payout to shareholders as a sweetener.

Gains of SGD0.27/share. SIA stated in the announcement that the carrying value of the Virgin stake had already been fully written off, and an amount of SGD117m of costs would reduce any gain on disposal. Hence, we estimate that SIA would book a one-off gain of ~SGD322m upon completion of the sale, translating to ~SGD0.27/share. The transaction is expected to close in the fourth quarter of calendar year 2013, and this one-off gain is factored into our FY3/14 estimates.

Divestment of underperforming investment a positive. While this one-off gain translates into a marginal 2% upward revision in our Target Price pegged to 0.9x FY3/14 P/BV, a divestment of such an underperforming investment with little strategic value should be seen as a positive for SIA. We also cannot rule out SIA paying out a special dividend as a sweetener for shareholders, translating to an additional 3.5% yield. For now our fundamental HOLD on SIA is maintained.

Source: Maybank Kim Eng Research - 12 Dec 2012