- We maintain our HOLD recommendation on SIA (SIA SP) with a S$10.00 target price. Odds of an earnings recovery is low, given continued yield pressures.
- While SIA's May pax loads improved 3.9ppt yoy, we believe this could be largely at the expense of yields.
- We expect yields to remain challenged in FY18 as excess capacity and security concerns over terror attacks lead to capacity diversions and impact Asian network carriers. For instance, US airlines are said to be reducing capacity from Trans-Atlantic routes and shifting to Trans-Pacific routes. This will exacerbate capacity pressure and consequently yields for most Asian carriers, including SIA.
- Separately, flight restrictions on Qatar Airways (QR) might not benefit SIA. QR has a 9% share of the Kangaroo route between Australia and Europe. However, competition for QR's share is keen and might not be in SIA's favour as the three primary Middle-Eastern carriers have lowered prices, with fares substantially lower than SIA’s.
- We also believe that a disposal of SIA Engineering (SIAEC) is not in SIA’s shareholders’ interest and is unlikely part of SIA's transformation plan. This is due to a) SIAEC's ROE is substantially higher than the parent airline and provides a much needed buffer to airline operations, b) about 60% of SIAEC's revenue is derived from SIA and the unit is vertically integrated with SIA's operations providing revenue and cost synergies.SIAEC also generally benefits when SIA places new orders and this can be evidenced by an engine JV with GE, following SIA’s purchase of GE9X Engines for the Boeing B777-9s.
SIA will likely provide greater details on its transformation plans by end-November. Until then, we expect the stock to languish sideways.
For now, we maintain our HOLD recommendation and target price of S$10.00. We will be sellers at 5% above our target price, and buyers near S$9.00.
