Disappointing earnings. SIA's 1HFY13 results were a let-down, with core earnings coming in at only SGD165.9m (YTD: -20.2%, 2QFY13 y-o-y: -44.7%, q-o-q: +7.1%). A single-tier dividend of six cents was also announced, versus 10 cents last year. The earnings were below our and consensus full-year projections, accounting for only 30% and 34% of the forecasts respectively. Its 1HFY13 revenue, which made up 48% of our full year estimate, grew 4%, bolstered by SilkAir's capacity expansion and SIA Engineering. However, a tripling of losses in the cargo division and the higher breakeven load factor following an increase in non-fuel expenses dragged down SIA's overall earnings. This is in contrast to our earlier bullish expectation of an upside surprise.

No yield upside just yet. Surprisingly, passenger yields were unchanged q-o-q (-2.6% y-o-y) as the company continued to aggressively offer fare discounts to beef up its load factor. SIA's cargo division, which has been floundering in the past few years, saw its yields dropping by 4.1% y-o-y amid feeble global economic conditions. SilkAir, too, saw its yields dipping by 3% y-o-y in 2QFY13 due to intensifying competition. We are lowering our yield assumptions for SilkAir and SIA's cargo division to reflect the group's current 1H yield.

Outlook still bleak. While the recent drop in jet fuel price is positive for SIA, demand for 2H remained weak in view of the potential yield compression amid intense competition. Despite these challenges, SIA's management is confident that the airline would be able to weather the storm given its strong balance sheet.

Downgrade to NEUTRAL. We are now forecasting lower yields for SilkAir and cargo. This will accordingly lower our topline and earnings estimates for FY13/FY14/FY15 by 2%/1%/1% and 35%/10%/10% respectively. In view of the tough market conditions and yields looking unlikely to turn positive, we are pegging our P/B multiplier to 0.9x from 1x earlier, which reduces our FV from SGD11.67 to SGD10.39. We downgrade SIA to a NEUTRAL from TRADING BUY as we had previously anticipated an upside surprise in 2QFY13.

 

 

Source: OSK