SINGAPORE (March 8): UOB Kay Hian says shares of Singapore Airlines (SIA), which have underperformed so far this year, are likely to at least keep pace with the benchmark Straits Times Index (STI) over the next three months.
According to UOB, SIA has trailed the STI by some 3.4 percentage points over the past three months. But the brokerage says it expects the stock to “at least market-perform in the near term”.
UOB is keeping its “hold” call on SIA with a target price of $10.40, and a suggested entry price of $9.90.
“Most of the known negatives are already priced in but potential positives have yet to be,” says UOB lead analyst K Ajith in a Wednesday report.
Ajith notes that SIA’s relative low valuations limit its downside risk. Shares of SIA are trading at 0.69x FY18F book value excluding SIA Engineering Company (SIAEC), which is one standard deviation below its long-term mean P/B of 0.9x.
“We expect share price to gradually head closer towards our target price of $10.40, especially if Feb 2017 operating statistics show a cyclical cargo recovery,” Ajith says.
In January, SIA’s overall cargo load factor SIA improved by 1 percentage point, while cargo traffic rose by 3.5%.
(See also: All SIA Group airlines see improved passenger load factors but Scoot)
“[The International Air Transport Association] notes that global PMI (purchasing managers’ index) new orders have been trending up and this bodes well for air cargo,” says Ajith. “IATA also notes that pharma and cross border e-commerce are poised to perform better.”
In addition, Ajith believes SIA could be a potential beneficiary from tensions between China and South Korea over the latter’s deployment of Thaad missiles.
“According to Bloomberg, China has asked tour agencies to limit travel to South Korea,” Ajith says. “We think Singapore’s tourism could receive a boost if it pans out.”
“Even a 5% diversion of South Korea’s Chinese traffic to Singapore would lead to a 20% rise in Singapore’s Chinese tourist arrivals, which could directly benefit SIA given that it has a 52% market share out of Changi,” Ajith adds.
Meanwhile, Ajith says SIA’s 49%-owned Vistara will be a beneficiary of any liberalisation of air traffic rights between UK and India.
“While details are sketchy, the liberalisation will likely expand the number of weekly flights for carriers of both nations, thus facilitating more direct traffic,” Ajith says.
SIA posted earnings of $177.2 million in the third quarter ended Dec 31, down 35.6% from $274.9 million a year ago. Revenue fell 2.5% to $3.84 billion in 3Q, from $3.94 billion in the same quarter last year.
(See also: Singapore Airlines 3Q earnings fall 36% to $177.2 mil)
As at 12.22pm, shares of Singapore Airlines are trading 2 cents higher at $9.97.
