FOCUS - Singapore Airlines can take advantage of A380 delivery delays


Singapore (XFNews-ASIA) - The tight capacity created by prolonged delays in the delivery of Airbus 380 aircraft can work to the advantage of Singapore Airlines Ltd, analysts said.

The airline has said the expansion of its capacity between its financial year to next March and the year to March 2008 will be reduced to about 1 pct from the 4-5 pct it originally planned, because it will get its first A380 only next October. SIA has firm orders for 10 A380s, with an option to buy nine more.

But SIA has said it will take measures to maximize utilization of the aircraft that it already has or that it will acquire in the interim.

At present, it has 88 passenger aircraft -- 58 Boeing 777s, 25 Boeing 747s and 5 Airbus A340s. The airline expects to have taken delivery of nine Boeing 777s and to have sold five older 747s by next March.

Analysts said that the tight capacity gave SIA room to increase fares and load factors.

The airline recorded a year-on-year increase of 5.9 pct in its passenger traffic in its financial second quarter, but there was weakness in its cargo business.

"We liked hearing SIA management speak about sweating the assets harder to extract more capacity," JP Morgan analyst Peter Negline said in a note.

"This exercise should be extremely beneficial for shareholders as the tight capacity environment should support solid improvement in load factors, which in turn should boost the share price."

But SIA may lose some lucrative traffic to other airlines because of limits on growth in its capacity, according to Merrill Lynch analyst Paul Dewberry.

Higher fuel costs were the reason for the year-on-year decline of 14.6 pct in SIA's net profit for its financial second quarter to 293.2 mln sgd. The airline said fuel expenses had climbed 31.9 pct year-on-year in its financial first half to 2.56 bln sgd.

But brokerages are bullish about SIA, many of them having raised their target prices and kept their "buy" ratings for its stock, because they believe the airline's business can grow and, in some cases, because they expect a capital restructuring of the company.

JP Morgan has lifted its target price for SIA to 16.50 sgd from 15.00 sgd "to reflect the hidden value remaining in the business and the strong fundamental earnings potential of the core operations."

JP Morgan also expects SIA to make an exceptional gain from the sale of its stake in Singapore Aircraft Leasing Enterprise (SALE).

"We have ... included a 500 mln-sgd exceptional gain in our year-to-March-2007 [earnings forecasts] from the pending disposal of SIA's stake in SALE," JP Morgan's Negline said in a note.

"Given the strong demand for aircraft assets presently, we believe that SIA is well placed to book a large gain on their investments."

Deutsche Bank has raised its target price for SIA to 17.30 sgd from 15.50 sgd to factor-in the company's cash pile from exceptional gains and the possibility of capital restructuring.

"We estimate that SIA could easily pay out a special dividend of 1.40 sgd per share or buy back 115 mln shares," Deutsche Bank analyst Stacy Shi said in a note. This would constitute a capital reduction of 9 pct.

Shi expects the company to have 2.40 sgd per share in net cash by the end of March. Shi remarked that SIA had bought back shares when its net cash level reached 1.60 sgd per share in the financial year ended March 1999, and that it had brought its net cash per share down to 1.00 sgd in the year to March 2000 and to 0.80 sgd in the year to March 2001.

In contrast, Citigroup has a "sell" rating for SIA, believing that the stock is fully valued.

"Although we rate SIA's competitive position and management highly, we believe most positives are in the price. Even if SIA divests SALE, it will only add 0.43 sgd to our target price," Citigroup analyst Corrine Png said in a note. Citigroup's target price for the stock is 16.10 sgd.

Merrill Lynch has a "neutral" rating for SIA because it expects some near-term weakness in the stock's price after the company's second-quarter results.

"However, improving year-on-year results, potential disposal gains and a strong revenue environment should offer support," Merrill Lynch's Dewberry said in a note.

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