New target S$13.35 (from S$8.50) — A tug-of–war between a turnaround in the Singapore economy and weak SIA fundamentals favours a well-supported SIA share price, helped by a "SATS dividend" worth S$1.65/SIA share. While we expect a June quarter operating loss to provide a reality check, we concede that SIA will remain above book value; and we re-benchmark our target to S$13.30 (1.1x FY10E P/B), raising FY10E EPS 60% to S$0.54, ROE 4.6%, on lower costs/higher traffic forecasts. We maintain our Sell ahead of June results but concede that SIA could be pulled up if the market recovery continues.

Market sentiment — SIA's 10-yr P/B discount relative to STI ranges from -6% to -34% with a mean of -20%. The discount is at its narrowest at both STI bottoms and peaks, and its widest just ahead of STI mean P/B levels. At a current STI of 2400 (= P/B of 1.47x), SIA at 1.14x P/B (Mar 09 BV/S S$11.78) trades at a 22% discount. History suggests that SIA shares tend to recover at inflexion points for passenger traffic growth, loads, and passenger spread vs break even, but rising oil/fuel prices as in 2004-06 delayed SIA price recovery.

Fundamental reality — June passenger traffic fell 18% YoY, up from a 23% YoY fall in May, marking a possible inflexion point. Load factor rose to 76% from 67%, reflecting a typical June seasonal traffic pick-up, plus efforts to cut capacity. However, overcapacity, higher QoQ jet fuel (June qtr US$67/bbl vs. March qtr US$55/bbl) and yield pressures may have lifted passenger/cargo breakeven loads above the 77%/75% in March 2009. Actual loads of 71.6% and 60.6% respectively suggest SIA may again report quarterly operating losses in June.