OCBC Investment 2015-08-24: Aviation Sector: Persistent headwinds


Aviation Sector: Persistent headwinds 

 No surprises from 2QCY15
 Headwinds hard to overcome

Review of 2QCY15 results of airlines 

  • The airlines continue to disappoint with weak results. 

Singapore Airlines’ (SIA) [HOLD; FV: S$11.27] 

  • 1QFY16 results were uninspiring, with a 3.2% YoY decline in revenue to S$3.6b. Though lower jet fuel cost helped improve PATMI by 162.1% to S$91.2m, if we strip out one-off income earned from the release of aircraft delivery slots, we believe its 1QFY16 PATMI is worse than a year ago. 

Tiger Airways (Tigerair) [SELL; FV:Under Review] 

  • 1QFY16 results was no surprise to us, as core net loss narrowed 88.8% YoY to S$1.7m, mainly from lower fuel cost and absence of one-off restructuring expenses. 

Review of 2QCY15 results of service providers 

  • Aviation service providers’ results came in more mixed: 

1) ST Engineering’s (STE) [HOLD; FV: S$3.33] 

  • 2Q15 results came in within expectations as core earnings fell 4.9% YoY to S$135.3m while the marine segment led the 2.6% decline in revenue to S$1.55b, 

2) SIA Engineering Company’s (SIAEC) [SELL; FV: S$3.45] 

  • 1QFY16 results missed our expectations as core PATMI dropped 13.6% to S$41.3m on fewer aircraft/engines workshop visits, mainly driven by increased maintenance cycle due to improved aircraft/engines designs, modification to existing design improving overall airworthiness as well as end of life cycle for certain products without replacement from the manufacturers, but 

3) SATS Ltd (SATS) [HOLD; FV: S$3.78] 

  • continued its steady growth as core PATMI grew 8.5% to S$47.1m despite a 4.2% decline in revenue as disciplined cost management, productivity gains and better business mix continues to bear fruit. SATS growth outlook remains stable as management stated plans to continue to make strategic acquisitions for inorganic overseas growth. 

Maintain UNDERWEIGHT on Aviation Sector 

  • Within the sector, SATS’ earnings remain the most resilient, which translates to stable dividend payout. However, outlook for airlines remain challenging, plagued by overcapacity, especially with the gulf carriers mounting serious competition on SIA’s key routes to Americas and Europe. Tigerair is making progress on its turnaround but growth is limited when it only operates out of Singapore. 
  • Times are tough and will remain so in the near-term for SIAEC, as maintenance cycles on newer/upgraded aircraft/engines are longer than before. On these reasons, we maintain UNDERWEIGHT on the Aviation Sector. 

Eugene Chua | http://www.ocbcresearch.com/ OCBC Investment Research 2015-08-24
HOLD Maintain HOLD 11.27 Same 11.27
SELL Maintain SELL 0 Review 0
HOLD Maintain HOLD 3.33 Same 3.33
SELL Maintain SELL 3.45 Same 3.45
HOLD Maintain HOLD 3.78 Same 3.78