SINGAPORE (Sept 19): UOB Kay Hian is maintaining its “hold” call on Singapore Airlines group with a target price of $10.10, valuing the group’s core airlines operations at 0.7 times FY18 forward earnings.

The research house recommends investors scoop up the stock at a lower entry price of $9.50.

In a Tuesday report, analyst K Ajith believes the Street is anticipating a 1-3% improvement in the group’s yields for FY18, but worries this may not materialise given concerns over repeated terror attacks in Europe and with increased competition faced by the group with the entry of Norwegian Air.

He also notes that while the carrier’s load factors continue to show improvement for the financial year, though its 0.3 percentage point growth in August is the lowest for the financial year.

“Restructuring of the America’s network, downward capacity adjustments out of Europe, and strong demand out of Asia led to improved load factors, albeit at the lowest period for FY18. Similarly, SIA’s pax traffic growth at 0.8% y-o-y increase was the slowest for FY18. In the year to date, pax traffic has risen by 3.1% y-o-y versus our expectation of 2.5% for the year,” explains Ajith.

Nonetheless, the analyst highlights how SIA’s European load factors have improved since April with load factors to the region rising 3.1 ppt in Aug this year.

“SIA has been cutting seat capacity to Western Europe since June, and also reduced seat capacity by 4% in August. We believe this is a prudent measure,” says Ajith.

“Meanwhile, the entrance of low-cost long-haul carrier Norwegian Air in September could pressure loads and yields on the European leg. In the previous quarter, Norwegian’s pax revenue/ASK in US dollar terms was 25% lower than SIA’s,” he adds.

As at 10.06am, shares in SIA are trading 6 cent lower at $10.14 or about 30 times FY18 forward earnings.

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