SIA
Good morning,
SIA (SIA SP) had underperformed the STI over the past three months but we expect the stock to at least market-perform in the near term. Our reasons are as follows:
- Relatively low valuations, which limit downside risk. SIA is currently trading at 0.69x FY18F book value ex-SIAEC, -1SD below long-term mean.
- SIA is a potential beneficiary of diversionary traffic from China to Singapore, as the group has a 52% share out of Changi. According to Bloomberg, China has asked tour agencies to limit travel to South Korea, in an apparent retaliation against the South Korea’s deployment of Thaad missiles.
- SIA could also benefit from a potential cargo recovery. IATA notes that global PMI new orders have been trending up and this bodes well for air cargo. Global cargo traffic rose 6.9% in January, with Asia Pacific airlines contributing to the bulk of the growth.
- We believe that SIA is a better beneficiary of any cargo recovery, given its lower capital cost and fuel hedges. SIA will have greater leverage from improving cargo traffic and loads compared with Cathay Pacific (CX, 293 HK) as SIA had written down the value of its freighters and would thus have minimal capital costs. SIA also has fuel hedges at lower levels, vs CX's hedges (US$75-90/bbl).
For now we maintain our HOLD recommendation, but downside risk is relatively low at current levels. Newsflow will likely be positive and we expect share price to gradually head towards our target price of S$10.40. Suggested entry: S$9.90.
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