Marginally below expectations. SIA reported a fairly weak set of results with net income of SGD68.3mn (4QFY12: -SGD38.2mn) for the quarter. Operating losses of SGD44.2mn was largely due to losses of SGD69mn and SGD39mn at the parent airline and its cargo unit respectively. On closer inspection, the group’s bottom line was flattered by the SGD54.7mn gain on disposal of ppe in the quarter. SIA announced slightly higher final DPS of 17cents, taking its full year payout to 23cents (FY12: 20cents). Guidance remains negative with management highlighting uncertainties on the global economic outlook with the ongoing weakness in Eurozone and sluggish recovery in the United States.

Yield environment remains weak. SIA reported the 5th consecutive quarter of decline in passenger yields for the parent airline. We expect weakness to continue into the next quarter on seasonal factors. Our negative view is supported by guidance for downward yield pressure in its latest statistical update (Apr 13). While the air freight market remains weak, we believe that further downside to cargo yields would be limited by the ongoing measures to rein in capacity (SIA parked one of its 13 freighters in Jan 13).

Recession level valuations to limit downside. At 1.0X P/B, SIA’s valuation is not far off its recession level multiples. Hence, we see limited downside on the stock despite the fairly weak business environment. Furthermore, the stock of SIA is very well supported by its net cash position of c.SGD3.7/shr.

Little scope for further re-rating. SIA’s stock rallied significantly off its low of SGD10.06 on expectations of recovery in the global economy. However, the latest set of results highlighted continued challenges for the airline industry and we see little scope for further re-rating at the current price. We upgrade on rating on the stock to HOLD (from Sell) with TP of SGD11.70, pegged to 1.0X FY14E BVPS.

Source: Maybank Kim Eng Research - 17 May 2013