Scooting ahead, but this stock is not yet about to take off

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SINGAPORE (Nov 8): Analysts are putting Singapore Airlines on “hold”, with cloudy skies ahead for the national carrier unlikely to be lifted by the integration of Scoot and Tigerair.

SIA reported a 70% fall in 2Q earnings to S$64.9 million as excess capacity and aggressive pricing by competitors depressed yields.

Group operating profit declined 15.5% to S$109 million and revenue fell 5.3% to S$3.65 billion for the three months to Sept.

(See SIA’s 2Q earnings fall 70% to $65 mil on weak operating numbers)

Most companies in the group recorded weaker operating results amid a sluggish global economy, with only Scoot and Tigerair bucking the trend.

Scoot and Tigerair overturned losses from a year ago to register operating profits of S$5 million and S$3 million, respectively.

Singapore Airlines on Friday revealed that Tigerair will be integrated into the Scoot brand under a single operating licence.

(See Tigerair to be integrated under Scoot brand)

“From the cost aspect, we believe there will be savings, though to a limited extent, through integration of support functions and touchpoint integration for customers,” says OCBC Investment Research lead analyst Eugene Chua in a Monday report.

“The real value of this integration is on its revenue growth potential,” Chua adds. “With a single licence, we expect the new Scoot to be more nimble in terms of flight scheduling to optimise flight connections between the two currently separate airlines.”

OCBC is maintaining its “hold” recommendation on SIA, but lowered its fair value estimate to S$10.22, from S$10.80 previously.

CIMB analyst Raymond Yap says SIA has been “stuck in first gear” for the past year, but the belated move will have “positive repercussions” for SIA.

“With this move, the SIA group is belatedly closing the yawning chasm that separates it from the highly-successful AirAsia group,” says Yap in a report on Friday. “The merger of brands and operations will be necessary to generate the revenue synergies that will finally justify the cost that SIA paid for the privatisation (of Tiger Airways).”

CIMB is keeping SIA at “hold” with an unchanged target price of S$10.47.

UOB Kay Hian lead analyst K. Ajith agrees that the integration could “lead to cost savings and incremental revenue”.

In addition, Ajith says it could be a prelude to a public offering.

“We believe that SIA could potentially list its low-cost arm to improve its liquidity position,” Ajith says in a Monday report. “The biggest challenge SIA faces is one of liquidity.”

According to Ajith, SIA has some S$17 billion of capex over the next four years, and estimates that its operating cash flow will only fund less than half of capex.

UOB is keeping its “hold” call on SIA, with a marginally higher target price of S$10.10, from S$10.00 previously.

Singapore Airlines is trading 4 cents lower at S$9.93.