SIA's 2Q stats saw commendable passenger growth despite the much anticipated decline  in  the  cargo  segment.  With  a  higher  load  factor  and  improved  aircraft utilisation,  2Q  is  likely  to  see  an  earnings  upside  surprise  despite  an  expecteddrop in yields y-o-y. We roll over our valuations to calendar year 2013 at 1x P/BV and  upgrade  SIA  to  a  Trading  Buy,  with  a  higher  FV  of  SGD11.67,  giving  a  12% upside. However, this is a short-term call as we remain cautious on its outlook.  
 
Passengers  holding  up;  cargo  drags.  SIA's  1HFY13  operating  stats  for  both passenger and cargo came in line with our expectation, accounting for 50% of our full-year forecast. SIA's September and 2QFY13 RPK grew by 7.7% and 6.5% y-o-y respectively,  thanks  to  the  boost  in  load  factors  which  were  also  up  by  1.3ppts  (to 80.6%)  and  0.5ppts  (to  79.8%)  respectively.  The  sharp  rise  in  passenger  traffic  y-o-y was largely due to the tail-end of the summer demand, which had boosted load factor in long  haul  destinations.  Load  factor  in  East  Asia  however,  faced  three  consecutive months of stiff competition from the Middle Eastern and low cost carriers. SilkAir's East Asian  operations  suffered  the  same  fate.  Cargo  continues  to  decline  for  the  sixth consecutive  month  '  down  by  4.2%  and  3.8%  y-o-y  respectively  for  total  tonnage carried for the month and quarter. Load factors in the East Asia and America region slid 4.4ppts (to 54%) and 2.7ppts (to 63.7%) y-o-y respectively.

Earnings  to  be  slightly  above  expectation.  The  boost  in  passenger  load  factor  and the  encouraging  passenger  growth  is  expected  to  lift  earnings  and  offset  any  impact from declining yields and losses from the cargo segment. Although yields are expected to be lower, we foresee that the impact would not be as severe as in 1Q (recall that 1Q yields  dropped  by  3.4%  y-o-y)  given  the  seasonally  higher  demand  for  summer  travel. We expect SIA to report better-than-expected numbers as our and consensus earnings forecasts  are  deemed  too  low.  SIA  reported  1Q  profit  of  SGD81.8m,  while  its  2Q earnings (which will be announced on 1Nov 2012) are expected to reach SGD220m (up from  SGD172m).  This  should  bring  1H  earnings  to  SGD301m,  accounting  for  73%  of our initial full-year forecast.

2Q  earnings  surprise? While  revenue  could  largely  be  in  line,  we  see  SIA  benefiting from  cost  cuts  and  improved  aircraft  utilisation  due  to  high  load  factors.  Specifically, commissions and incentives are likely to be lower and the increase in staff costs would not be as high as we had initially expected. In addition, jet fuel costs have stayed flat y-o-y and we expect limited losses from the Scoot start-up, if any, as its operation scale is still small. Hence, we upgrade earnings for FY13/FY14/FY15 by 34%/5%/5%.

Upgrade  to  TRADING  BUY.  We  roll  over  our  valuations  to  calendar  year  2013  at  1x P/BV and upgrade SIA to a Trading Buy, with a higher FV of SGD11.67, giving a 12%upside. However, this is a short term call as we remain cautious on SIA's outlook.

Source: OSK