Singapore Airlines: Attractive Buy at Near-Trough Valuation of 0.8x P/B & 31% Discount to Liquidation Value

Singapore Airlines company logo

Singapore Airlines Ltd (C6L:SGX)

Price Target: S$13.00 | Rating: Buy

18 Sep 2018, Singapore – SIA Group’s operating performance was stronger than expected in August and is an attractive Buy at current levels with 3.5% dividend yield and limited downside risk, in our view. Following its recent correction, SIA’s valuation has fallen to 0.8x P/B, close to its historical trough valuation and at a 31% discount to our estimated “liquidation value” for SIA Group of S$13.7. 

Chart: Singapore Airlines Price/Book Valuation (2003 to 2018)

Singapore Airlines Price/Book Valuation (2003 to 2018)

Here are our key takeaways from SIA Group's August operating performance:

#1 Double-digit growth in passenger traffic for the Group

SIA Group’s passenger traffic surged 11.7% y/y in August. The strong travel demand significantly outpaced SIA Group’s capacity expansion of 6.1% y/y.

Specifically, Singapore Airlines and SilkAir’s passenger traffic grew 8.9% and 8.8% y/y respectively while Scoot’s passenger traffic surged 23.5% y/y in August.

#2 Passenger load factors improved in all route regions for all 3 carriers in the Group

Overall, SIA Group’s passenger load factor improved 4.3ppts y/y to a high of 85.2% in August. Passenger load factors improved across all route regions for all carriers during the month – Singapore Airlines passenger business (84.8%, +4.4ppts y/y), SilkAir (79.4%, 3.6ppts) and Scoot (88.3%, +3.5ppts).

Most notable load factor increases were in Singapore Airlines’ West Asia & Africa and South West Pacific route regions where passenger load factors increased 9.3ppts and 5.6ppts y/y to 80.8% and 83.3% respectively in August. Scoot’s West Asia loads also increased 10.5ppts y/y to 82.1%.

For the long-haul routes, Singapore Airlines’ Americas and Europe route regions are running at 87.8% (+3.2ppts y/y) and 88.1% (+4.2ppts) utilization respectively while Scoot’s is running at 89.1%, +5ppts y/y in August.

#3 Cargo traffic and load factor performance pale in comparison with sector peers

SIA Cargo’s performance was, however, lackluster and paled in comparison with sector peers. Cargo traffic rose only 0.9% y/y in August, mainly due to weaker cargo shipments on Transpacific routes compared to short-haul.

Cargo load factor fell slightly by 0.3ppt y/y to 63.1%. Notably, SIA Cargo’s load factor on the Americas route declined 2.6ppts y/y to 61.5%.

Chart: SIA Group Traffic Growth Y/Y (August 2018)

SIA Group Traffic Growth Y/Y (August 2018)

#4 September growth momentum to be dampened by earthquakes and typhoons in Japan, Hong Kong and the Philippines

We expect the multiple calamities in some of SIA Group’s major travel markets in Asia, including Japan, Hong Kong and Philippines, to dampen SIA Group’s operating performance in September.

#5 Key downside risk - Yields could remain under pressure as industry capacity growth to/from Singapore is still expected to accelerate in 4Q18

We expect the airline industry’s capacity growth to/from Singapore to accelerate in 4Q18, even higher than the growth pace in Jan-Sep 2018, which could keep yields under pressure for SIA Group. See our previous report for more details:

Airline capacity growth to moderate from 4Q18, benefitting Asia Pacific airline yields but hurting airport growth

 

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report.

 

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