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Singapore Airlines (SIA) Summary

Core Information

• Share Price: SGD10.51
• Target Price: SGD12.00 (+14%)
• Market Capitalization (USD): SGD12.4B
• Free Float (%): 43.2
• Major Shareholder: Temasek Holdings Pte Ltd. (54.8%)
• Recommendation: BUY (Unchanged)

Strategic Positioning in Australia

• Singapore Airlines has formed a strategic alliance with Virgin Australia since 2011 to strengthen its presence in the Australian market.
• This alliance is designed to weaken Qantas group's dominance by offering codeshares, coordinated schedules, and reciprocal frequent flyer programs.
• The partnership is particularly beneficial for SIA in the Kangaroo route (Australia-Europe), where it is better positioned than other Asian carriers.
• The Southwest-Pacific route accounted for 17% of SIA's passenger airline operation sales in FY3/14.

Market Trends and Performance

• Premium traffic volume between the Far East and Southwest Pacific increased by 10.6% YoY in the first four months of the year.
• SIA is expected to benefit from this trend due to its strong presence in the premium segment.
• Virgin Australia's loyalty programme membership has almost doubled from 2.1m in mid-2010 to 4m in Feb 2014, outpacing Qantas Frequent Flyer membership growth.
• This indicates improved market penetration for Virgin Australia, which in turn benefits SIA.

Financial Performance

Metric	FY13A	FY14A	FY15E	FY16E	FY17E
Revenue (SGD m)	15,098.2	15,243.9	15,613.4	16,629.0	18,210.0
EBITDAR (SGD m)	2,394.6	2,510.0	2,901.2	3,335.5	4,002.7
Core Net Profit (SGD m)	411.2	397.8	707.5	990.5	1,459.3
Core EPS (cts)	35.0	33.8	60.2	84.2	124.1
Core EPS Growth (%)	21.9	(3.3)	77.8	40.0	47.3
Net Dividend Yield (%)	2.2	4.4	3.3	3.8	4.3
ROAE (%)	3.2	3.0	5.3	7.3	10.1
ROAA (%)	1.8	1.8	3.1	4.3	6.0
P/BV (x)	0.9	0.9	0.9	0.9	0.8

Valuation and Risk

• SIA's share price has shown 0.4% gain in the last month and 2.9% over the last year.
• The stock is currently priced at crisis-level valuations with a P/BV of 0.9x, suggesting limited downside risks.
• The EV/EBITDAR ratio has been decreasing, indicating potential for recovery.
• The Core P/E ratio is expected to drop from 30.0 in FY13A to 8.5 in FY17E, reflecting improved profitability and growth.

Key Financial Highlights

• Revenue Growth is expected to increase significantly, from 1.6% in FY13A to 9.5% in FY17E.
• EBITDAR Growth is projected to rise from -3.1% in FY13A to 20.0% in FY17E.
• Core Net Profit Growth is expected to be strong, increasing from 20.5% in FY13A to 47.3% in FY17E.
• Pretax Profit Margin is anticipated to improve from 3.2% in FY13A to 9.8% in FY17E.

Strategic Implications

• The strategic alliance with Virgin Australia is a key factor in SIA's ability to capture market share in the Australian market.
• SIA's exposure to the premium market is increasing, especially in corporate and government segments.
• The Kangaroo route is crucial for SIA, with 5.1m journeys annually, although only 10% are direct flights.
• The market has not fully recognized the value of this strategic alliance, leading to underappreciated performance.

Conclusion

• Despite regional overcapacity challenges, SIA's resilient share price indicates low market expectations and potential for recovery.
• The strategic alliance with Virgin Australia is a significant advantage in the Australian market.
• Premium traffic growth and improved profitability support the BUY recommendation with an unchanged target price of SGD12.00.