What is the news?

SIA reported a 6% improvement in headline profits of S$142.5mn in the quarter. Adjusted for the one-off S$19.9mn of provisions for penalties, net income would have improved by 20%y-y. Operating losses narrowed for SIA Cargo to S$29mn as compared to losses of S$40mn the year before. While SIA Engineering and SilkAir reported stronger operating profits, profits for the parent airline declined due to weaker yields. Outlook statement remains negative due to concerns over the economic in Europe and US. Management continues to guide for pressure on loads and yields.

How do we view this?

The group’s net profit was marginally above our expectations. However, our expectations of a seasonal uptick in passenger yields for the parent airline did not materialise and is a key disappointment for us. While management does not disclose separate financial information for Scoot, we estimate that they might have been marginally profitable in the quarter.

Investment Actions?

While near term challenges for SIA remain, we believe that the negative outlook had largely been priced into the depressed valuation of the stock. We rolled forward our valuation basis to FY14E, but lowered our valuation multiple to 1.1X P/B. Downgrade to Accumulate with TP of S$13.00.

Source: PhillipCapital Research - 13 Feb 2013