Transport Sector 2H17 - CIMB Research 2017-05-30: Underweight From Neutral

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Transportation Sector Singapore Stock 2017H2 Outlook SINGAPORE AIRLINES LTD C6L.SI SATS LTD. S58.SI COMFORTDELGRO CORPORATION LTD C52.SI

Transport Sector - Underweight From Neutral

Key question (land transport): When will the Singapore taxi industry stabilise? 

• The potentially deteriorating taxi profit due to stiff competition from private hire car services, such as Uber and Grab, is a key near-term concern for ComfortDelGro (CD). CD’s Singapore taxi fleet size has been declining since Apr 16 and the pace accelerated in 2017. As of Mar 2017, CD’s Singapore taxi fleet size stood at 16,047, representing a 5.7% decrease yoy. In addition, CD’s Singapore taxi idling rate climbed to 3.0-3.5% in 1Q17 vs. close to zero in 1Q16.
• We believe that the smaller Singapore taxi fleet size and higher idling rate contributed to part of the 12% yoy decrease in group taxi operating profit in 1Q17 (other factors being lower overseas taxi profit due to adverse FX translation and competition faced in the respective markets).
• FY17 could be a challenging year for the traditional taxi operators due to the implementation of the Private Hire Car Driver Vocational Licence framework, which is likely to intensify the competition between traditional taxi and private hire car operators for eligible drivers. We think the competition pressure is likely to taper off and the industry could reach a new equilibrium in FY18F.

2H17 outlook 

• We expect CD’s taxi profitability to remain under pressure in 2H17 given the stiff sustained competition from private hire car operators. Nevertheless, we are cautiously confident of moderate overall group net profit growth of 2% for the whole year of FY17F, underpinned by 
  1. improving Singapore rail profit as Downtown Line (DTL) stage III is expected to commence operation in the middle of 2H17, 
  2. full-year benefit from the Singapore public bus reform (effective from Sep 16 onwards), and 
  3. profit contribution from the additional stake in its Australian bus business (acquisition completed in Feb 17).
• We recently downgraded ComfortDelGro from Add to Hold with the target price of S$2.78. 
• Possible earnings-/value-accretive M&As are key upside risks to our call while a faster-than-expected deterioration of taxi profit is the key downside risk.

Key question (Aviation): Can SIA 'transform' itself to overcome yield pressures and heightening competition? 

• We think this is an uphill task. We do not expect SIA’s yield pressure to be alleviated over the next two years as structural changes in the region have significantly altered the industry’s competitive landscape. Although the airline has been in transformation mode for the past 5-6 years since the current CEO Mr Goh Choon Pong took over the reins, we are unclear how much more SIA can do in this latest phase of transformation.

2H17 outlook 

• Unabated yield pressure may worsen if oil prices rise further as the airline may not be able to pass through the costs to passengers. Consensus is likely to maintain earnings for now as SIA disappointed significantly during 1QCY17 (4QFY17) and the market has already made large downward adjustments to earnings forecasts. 
• We recently downgraded SIA from Hold to UW with a target price S$10.00.

Key question (Airport Services): Can SATS retain double-digit earnings growth? 

• Based on core earnings, perhaps not. SATS' Margins for FY18F will be affected by the absence of licensing fee rebates (c.S$15m p.a.) from May 17 onwards. To recap, Changi Airport offered a 20% rebate on ground-handling and flight-catering fees from May 2015 to spur traffic amidst stiff competition from the regional airports.
• Upside risk is if Changi re-introduces such rebates upon the opening of Terminal 4. In our earnings, we have excluded the rebate.

2H17 outlook 

• We expect steady growth in Changi Airport’s passengers and flights handled of c.4-5% to support SATS’s topline growth. Steady global trade and the effects of Hanjin’s bankruptcy could continue to support freight tonnage handled. 
• We have also factored in exceptional gains of c.S$8m from the deconsolidation of SATS HK in FY18F. Even with this, SATS will deliver similar profit as FY17 (no growth).
• The opening of Terminal 4 is unlikely to see a steep pick-up in volume in the next one year but this should gradually improve in the medium term.

POSITIVE CATALYSTS TO LOOK FOR

Comfortdelgro: 

1. Expected turnaround of the MRT Downtown Line with stage III slated to commence operations in 2H17, 
2. yoy improving Singapore bus profitability under the government contracting model and 
3. possible overseas M&A activities.

SATS: 

• The opening of Terminal 4 may encourage airlines to schedule more flights to Changi.

Singapore Airlines: 

1. Transformation Office that will leave no stone unturned in an effort to drive revenue across different divisions, improve collaboration, and drive down costs, 
2. Scoot and Tigerair - are working to merge their businesses by 2HCY17, and better coordinate schedules to enable better transfer times between long-haul and short-haul. This may generate new growth for SIA group.

NEGATIVE CATALYSTS TO FEAR 

Comfortdelgro: 

• Possible further erosion of taxi profit due to stiff competition from private hire car operators Uber and Grab.

SATS: 

• Margin to trend downward without licensing fee rebate from Changi Airport.

Singapore Airlines: 

1. It has committed S$30bn over the next five years on aircraft renewal and product enhancements. However, SIA only has a cash balance of S$3.4bn at end-March 2017, hence it would need to borrow heavily to fund its capex plans. 
2. Aggressive state-owned carriers like the Middle East carriers and Chinese airlines are continuing to push their expansion agenda, competing more aggressively against SIA and weakening its yields.

TOP PICKS: NA
TOP SHORTS: SIA, SATS

Singapore Research CIMB Research | http://research.itradecimb.com/ 2017-05-30

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