SINGAPORE (Aug 1): OCBC Investment Research is maintaining Singapore Airlines at “hold” with $10.10 fair value on absence of clear signs of a recovery in yields on the back of persistently competitive landscape.

In a Tuesday report, analyst Eugene Chua expects competition to remain intense with Chinese carriers expanding capacity aggressively on the North-Asia and Transpacific routes and from the Gulf carriers’ persistent pressures on the Southwest Pacific routes.

“On the back of a seemingly improving global economic outlook that drives demand in passenger traffic, and coupled with support from premium economy, we are also forecasting a slowdown in decline in SIA’s passenger yields over the next two years,” says Chua.

Singapore Air’s 1QFY18 revenue grew 5.6% y-o-y to $3.86 billion, as higher passenger traffic outstripped the decline in passenger yield. Parent airline recorded better performance on higher traffic despite the slight decline in yield. SIA Cargo posted a surprisingly positive quarter on higher freight carriage and improvement in yield.

However, operating profits for SilkAir and Budget Aviation Holdings’ Scoot and Tigerair came in lower y-o-y mainly due to significant capacity growth and weaker yields. 1Q18 operating expenses rose 3.4% y-o-y to $3.58 billion, driven mainly by increase in net fuel costs on higher average jet fuel prices, and ex-fuel costs partly attributable to enlarged operations of SilkAir and BAH. Consequently, SIA’s 1QFY18 reported PATMI fell 8.4% y-o-y to $235.1 million.

However, excluding one-off adjustments of $115 million from KrisFlyer programme and further recognition of compensation of $58 million for changes in aircraft delivery slots recorded in 1Q18 as well as one-off items recorded in 1Q17, 1Q18 core PATMI grew 69.7% y-o-y to $62.1 million.

“While 1Q18 core PATMI only formed 15.5% of our FY18 forecast, we expect SIA to turn in a better performance for the remaining quarters due to seasonality effects. Factoring in the one-off items recorded in 1QFY18, we raise our FY18F PATMI by 42.7%,” says Chua.

Update: Shares in SIA closed 21 cents higher at $10.49 on Tuesday.