SINGAPORE (Feb 9): UOB Kay Hian maintains its “hold” rating in Singapore Airlines (SIA) while raising its target price on the stock to $10.40 from $10.10 previously, following the release of the carrier’s 3Q17 results.

The suggested entry price is $9.60 based on a 10% total return, inclusive of dividends.

(See also: <a href="http://theedgemarkets.com.sg/article/singapore-airlines-3q-earnings-fall-36-1772-mil" target="_blank">Singapore Airlines 3Q earnings fall 36% to $177.2 mil</a>)

To recap, SIA has hedged 37.4% of its jet fuel requirements for 4Q in Singapore Jet Kerosene (MOPS) at a weighted average price of US$67 per barrel ($95 per barrel). The group has also entered into longer-dated Brent hedges with maturity extending to 2022, covering 33-39% of its projected annual fuel consumption, at average prices ranging from US$53 to US$59 per barrel.

In a Thursday report, UOB analysts K Ajith and Sophie Leong note that the longer-dated Brent hedges are “at relatively attractive levels with low premium to spot”, which could give the carrier a competitive edge in the case of fuel prices rising substantially.

However, they intend to await “clearer signs of lower airline capacity additions and further consolidation in the container shipping space for a meaningful recovery [in the cargo space]” given how both SIA and SilkAir’s yields both worsened q-o-q.

“We had highlighted that capacity cuts by Emirates would be a positive sign but we have yet to see any signs of improved pricing. Chinese airlines are similarly dumping fares, particularly on South West Pacific routes. SIA’s only recourse is to focus on premium cabins and to this effect, it is increasing the proportion of premium-economy seating. This could stem the decline in yield,” opine Ajith and Leong.

While the analysts do not expect cargo profits to be sustainable, they reckon that the group’s cargo losses should narrow due to a broad-based improvement in cargo as well as higher engine aircraft and pharmaceutical shipments.

They do, however, anticipate yields to remain under pressure depending on capacity additions, as cautioned by SIA.

“SIA’s [fuel hedging] move will likely be closely watched by its competitors and could potentially lead to similar moves,” add the analysts.

As at 2:55pm, shares of SIA are trading 12 cents higher at $9.92.

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