OCBC Investment Research 2015-06-16: HOLD SIA, Noble Group, SELL Tiger Airways

Aviation Sector: Yet another blow to airliners

Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus from the same family as SARS, and first identified in 2012, is threatening to deal yet another blow to the aviation industry. Just this morning, South Korea reported four new cases of MERS, taking the total to 126 cases (with ten fatalities), and is also the country facing the largest outbreak outside of Saudi Arabia.

We believe MERS will certainly affect the aviation industry, especially the airline businesses, given that MERS is both deadly and contagious. In view of various responses from both public authorities and commercial businesses, we believe the impact from the outbreak is likely to be short-term in nature and contained at South Korea.

On these reasons, we opt to keep our forecast unchanged for both SIA [HOLD; FV: S$11.59] and Tigerair [SELL; FV: S$0.30] for now. However, in view of weaker global economic growth as World Bank on 10 Jun cuts its forecast for 2015 from 3.0% to 2.8% as well as persistent overcapacity reasons, maintain UNDERWEIGHT on aviation sector.

Noble Group: S&P keeps investment grade; cuts outlook

Standard & Poor’s has retained Noble Group’s investment grade rating at BBB-minus, following a review; but has cut its outlook from “stable” to “negative” on concerns of higher earnings volatility. The ratings agency notes that “the higher risk nature of Noble's trading positions could result in more volatile earnings and profitability for the company”, given that “the long-dated nature of these contracts creates a mismatch between profit recognition and cash realization”.

Nevertheless, Noble said that it will be working to meet certain criteria over the next 9-12 months to address the outlook downgrade. Still, Noble highlighted that all three credit ratings agencies have now affirmed the company’s investment grade status.

Earlier, chairman Richard Elman wrote in an open letter posted on the company’s website, asking stakeholders to “have a little confidence and patience in us”, and management will right the damage and will use its best efforts to recover the share value of the company.

We currently have a HOLD on the stock with a fair value of S$0.61 (based on 8x FY15F EPS). (Carey Wong)

Source: http://www.ocbcresearch.com/