BROKER CALL - Hong Kong's Cathay Pacific cut to 'hold' from 'buy' - Citigroup


Hong Kong (XFNews-ASIA) - Citigroup said it has cut its recommendation on Cathay Pacific Airways Ltd to "hold" from "buy", given the airline's "disappointing" operating results for September and a lack of near-term catalysts to warrant a further upside for the stock.

Citigroup, however, raised its price target for Cathay to 17.0 hkd from 16.40 due to lower crude oil price assumptions. The 2006 net profit forecast for the airline has also been raised, by 3.3 pct to 3.85 bln hkd from a previous estimate, and the 2007 estimate by 3.8 pct to 5.0 bln hkd.

The investment house said it has cut its forecast for Singapore jet fuel to 75 usd per barrel from 80 usd to reflect the recent oil price performance.

The stock is recommended a "hold" as Citigroup said it sees a "moderating in demand" for Cathay's services. The airline's revenue passenger kilometers (RPK) for September rose 6.2 pct year-on-year, lower than Citigroup had expected. Citigroup did not say what its estimate was for Cathay RPK for the month.

"We have moderated our outlook for growth and have cut our forecast of RPK growth for 2007 from 11pct to 9.5 pct," it said. "There is no longer enough upside to warrant a 'buy' rating," it added.

It said that it has not assigned any value for further restructuring in Cathay, although it sees possible mergers in the horizon.

"We continue to believe that the acquisition of Dragonair is only the first stage of a restructuring that could eventually see both Air China and Cathay Pacific merging," it said.

It said Cathay will continue to benefit from its merger with Dragonair.

"We continue to model little by way of revenue synergies from Dragonair and believe that cost synergies alone could more than double the contribution from Dragonair in 2007," it said.

In today's trade, Cathay closed up 0.22 hkd or 1.30 pct at 17.12.

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