Singapore Airlines (SIA) traded ‘ex’ the SATS entitlement in mid August (value; approx $1.70 per share). SIA management estimate this distribution would have reduced NTA to $10.68 at the end of FY09. We expect losses in FY10 although the impact on net assets should be mitigated by increases in fair value reserves (our FY10 book value per share estimate is now $10.94). This means we think SIA is trading on 1.2x FY10E book value (in-line with mid-cycle levels).

Our forecasts assume that passenger and cargo volumes recover over the course of the coming year and we expect year-on-year volume growth from the March quarter 2010 (despite capacity cuts). However, we expect yields to lag the traffic recovery due to the competitive nature of the aviation industry, year-on-year reductions in fuel surcharges and ultimately the reintroduction of latent capacity.

We expect airline industry pricing challenges to be compounded by structural problems at SIA caused by the new fleet configuration. We would be surprised to see SIA generate the yield premium it needs to justify the recent investment in its on-board product on the Boeing 777-300ERs (now 20% of the fleet).

We have cut our FY10 EPS estimate from $-0.19 to -0.29; FY11 from $0.61 to 0.51. Our DCF-based PT moves from $10.50 to $9.00 implying a FY11E price/book of 0.8x. We think this is fundamentally justified by the poor returns outlook.