Aviation Sector - OCBC Investment 2015-12-08: Still flying in turbulent winds

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SIA ENGINEERING CO LTD S59.SI  SATS LTD S58.SI  SINGAPORE AIRLINES LTD C6L.SI  ST Engineering SINGAPORE TECH ENGINEERING LTD S63.SI  TIGER AIRWAYS HOLDINGS LIMITED J7X.SI 

Aviation Sector: Still flying in turbulent winds

 Generally weak performances
 Competition set to increase
 Maintain UNDERWEIGHT

Largely disappointing results from airlines

• Pressures on passenger yields had a large part to play in the largely disappointing earnings reported by the airlines for 9MCY15.
• Singapore Airlines (SIA) missed our expectations for all three quarters of CY15, as earnings were marred by
  1. weak cargo operations,
  2. declining contributions from its aircraft maintenance, repair and overhaul (MRO) business,
  3. eroding passenger and cargo yields, and
  4. higher operating costs from retrofitting for premium economy.
• Tiger Airways (Tigerair) remained unprofitable, although core net loss has been narrowing with its turnaround plan making progress. With its business trimmed and operating only out of Singapore, overcapacity in this region is still a concern for Tigerair with Low Cost Carriers (LCCs) still expanding based on orders placed for new aircraft.
• Nevertheless, we think lower jet fuel will help boost earnings ahead but likely limited by the conservative hedging policy of SIA Group.

Unexciting performances from service providers as well

• Aviation service providers’ results came in mixed.
• ST Engineering’s (STE) 9M15 net earnings eased 1%, dragged by its marine segment. Although the outlook remains soft, its valuation looks attractive at the current price level.
• SIA Engineering Company’s (SIAEC) earnings saw declines across all three quarters of CY15, driven by improved airworthiness of aircraft and engines resulting in longer intervals between workshop visits. We believe headwinds are likely to persist for at least another 12-18 months.
• SATS Ltd (SATS) is the only one that reported rather resilient performance in a difficult industry, with earnings growth driven mainly by operational improvements and disciplined cost management. SATS is likely to continue its stable growth on reasons such as productivity gains and the expected improving contributions from overseas investments.

Maintain UNDERWEIGHT on Aviation Sector

• In our view, the outlook for aviation industry remains muted, especially for the airlines, as the region continues to be plagued by overcapacity.
• With the Gulf carriers expanding capacity on SIA’s key routes to Europe, and Lion Group expanding capacity within the Asia region, we believe competition will most likely increase further for SIA Group.
• With longer maintenance cycles on the newer/upgraded aircraft/engines, MRO businesses will continue to face challenges.
• On these reasons, we maintain UNDERWEIGHT on the Aviation Sector, and maintain our ratings on SIA [HOLD; FV:S$11.45], Tigerair [Accept The Offer], SIAEC [HOLD; FV:S$3.70], STE [BUY; FV:S$3.22], and SATS [HOLD; FV:S$3.78].

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-12-08

HOLD Maintain HOLD 3.70 Same 3.70

HOLD Maintain HOLD 3.78 Same 3.78

HOLD Maintain HOLD 11.45 Same 11.45

BUY Maintain BUY 3.22 Same 3.22