Singapore Airlines Taking 25% Stake in Air India; FVE Lowered

We lower our fair value estimate for no-moat Singapore Airlines, or SIA, to SGD 5.30 from SGD 5.70 due to an initial cash outflow of SGD 360 million plus the potential additional capital injection of up to SGD 880 million associated with the proposed investment into Air India, or AI. The cut in our fair value estimate largely reflects reduced cash holdings at SIA. The acquisition follows the merger of SIA’s 49%-owned Vistara and AI. SIA aims to take a 25% stake in the merged entity to capture the growth opportunity in the Indian aviation industry and create strategic synergies and scale synergies. While we think this is strategically potentially positive, we think there are risks that returns may be below SIA’s current returns on its invested capital for some time. Pending further quantifiable improvements to the current lossmaking AI and Vistara, we remain conservative about the future cash flow contribution of AI to SIA.