PO cut to S$9.00 as forward revenue continues to look dire We reiterate our Underperform rating on Singapore Airlines (SIA) and maintain that the worst of the current downturn still lies ahead. Prebooked revenues for the Mar-Q are down 23% down from the Dec-Q as demand continues to fall for air travel. With FY10 margins forecast to be SIA’s lowest since 1986 we continue to set our PO at its average crisis multiple of 0.75x PBV or S$9.00 (cut from S$9.25).

Dec-Q earnings were not quite as bad as feared due to a stronger than expected cargo performance and cost cutting measures. Net income of S$337mn beat our S$288mn forecast and consensus of S$312mn, but the result included S$46mn in disposal gains. Associate income was worse than expected and we also note an unexplained S$406mn associate impairment charge was made through reserves.

Air cargo, often seen as a leading indicator for the passenger segment, continues to deteriorate, while we fear the collapse in premium traffic demand from financial services firms is now spreading to other industries. SIA has high exposure to both segments, while its core UK-Australia business is facing increased competition as Emirates and Qantas launch Heathrow A380 services and from AirAsia-X.

SIA has been the best performing Asian airline over the last 12 months due to its strong balance sheet, but is still down 33%. We see no reason for the stock to recover given the outlook and its high exposure (40% of revenue) to the poor premium traffic segment. However, we lift our DPS forecast for FY09 from S$0.70 to S$1 on our view that Temasek will want access to SIA’s cash reserves.