Transport 2016 Outlook - DBS Research 2015-12-17: Persistent low oil prices a boon

Transport 2016 Outlook - DBS Research 2015-12-17: Persistent low oil prices a boon HUTCHISON PORT HOLDINGS TRUST NS8U.SI  CHINA MERCHANTS HLDGS(PACIFIC) C22.SI  NEPTUNE ORIENT LINES LIMITED N03.SI  SMRT CORPORATION LTD S53.SI  COMFORTDELGRO CORPORATION LTD C52.SI  SIA ENGINEERING CO LTD S59.SI  SINGAPORE TECH ENGINEERING LTD S63.SI 

Transport 2016 Outlook - Persistent low oil prices a boon

  • With oil prices likely to stay low, operators should continue to see relief on the cost side, especially airlines, as expensive hedges expire.
  • Neutral on land transport names though there is upside risk for SMRT if the rail reforms come sooner than expected and if terms are better for SMRT than anticipated.
  • Our top picks are ST Engineering (BUY, TP S$3.60) and CMH Pacific (BUY, TP S$1.45). 



Land Transport: CD (HOLD, TP S$3.00), SMRT (FULLY VALUED, TP S$1.24)


 All eyes on transport reforms in Singapore.

  • We have a Fully Valued rating on SMRT as we believe the market has been overly optimistic on the possible impact of the NEW Rail Financing Framework, with the stock trading at over 26x PE. The risk to our call is if rail reforms and/or terms are better than expected. 
  • Trading at higher than 1.5x standard deviation above its 5-year average at 19x FY16 PE currently, we believe potential upside from bus reforms has been largely priced-in, and this underlines our HOLD call for ComfortDelgro. 


Airlines – Lower fuel costs ex-hedging to offset pressure on yields


 Look forward to substantially lower hedging losses, but yields still under pressure.

  • With jet fuel prices likely to stay fairly benign in 2016 (we expect oil prices to move up modestly from 2H16 onwards), airlines can expect to alleviate costs further from 2015 as expensive fuel hedges expire. 
  • Even with yields under pressure (partly from passing on lower fuel costs to consumers), we expect earnings for airlines to improve in 2016. 


Container Shipping – NOL (ACCEPT THE OFFER)


 Accept CMA-CGM’s offer of S$1.30 per share.

  • The proposed offer price of S$1.30 values NOL at 16.1x EV/LTM EBITDA and a P/BV of 0.96x; NOL’s listed peers are valued at an average of 12.3x EV/LTM EBITDA and 0.66x P/BV. Thus, in terms of valuation, the offer represents a 30% premium compared to peers on an EV/LTM EBITDA basis and a 44% premium on a P/BV basis. It also represents a 30% premium over our latest target price of S$1.00, which was based on 0.8x P/BV to reflect deteriorating earnings.


Infrastructure and Logistics: High yields


 Attractive dividend yields on offer for both HPH Trust and CMH (Pacific).

  • We expect HPH Trust’s earnings to grow at a modest pace, driven by low single digit gains in both volumes and ASPs. Meanwhile, for China Merchants Holdings Pacific (CMH (Pacific)), the contribution from newly acquired roads should help drive substantial gains at the bottom line. 
  • Both companies should generate strong cash flows to help sustain an attractive dividend yield for investors. 


MRO: Prefer ST Engineering over SIA Engineering


 Could SIA Engineering be an M&A candidate?

  • We have a BUY rating on ST Engineering for its diversified portfolio and strong order book of S$12.2bn, which provides firm earnings visibility and sustainability. 
  • While SIA Engineering is a HOLD, it should be interesting for investors to keep an eye on it as a potential candidate for merger or take-over, especially given the spate of M&A activities in 2015.


Risks


 Could high oil prices make a comeback?

  • With Brent crude at just US$40/bbl, and not likely to rebound soon, transport operators are enjoying some halcyon days. However, there is always a risk that oil prices could spike up (for example due to geo-political events) and impact margins. Additionally, much of the cost savings from lower oil prices could also eventually be passed on to consumers and customers.

 Tepid demand, excess capacity and weak prices remain key concerns.

  • For shipping and airlines, competition and excess capacity remain key challenges to overcome in a bid for sustained profitability. At the same time, rates and yields are also under pressure as a result of both over-capacity and weak demand growth.


Valuations & Stock Picks


  • We offer three picks for 2016:

 ST Engineering (BUY, TP: S$3.60). 

  • The group has an order book of S$12.2bn, which covers close to two years of revenue, and provides good visibility ahead. We believe the strength in the Electronics division will help to offset weakness in Marine division over the next 2 years and allow STE to report steady earnings and dividends in the near term. 
  • Given the healthy orderbook, strong balance sheet and dividend yield of 4.5%, we maintain our BUY call on the counter. Share price should be supported by the upcoming final dividend. 

 CMH Pacific (BUY, TP S$1.45). 

  • We continue to like CMH (Pacific) for its unique combination of yield (> 8%) and growth, driven by both organic traffic growth and acquisitions. 
  • A potential re-rating catalyst for the stock would be further toll road acquisitions in China to boost its long term earnings growth prospects. 


 HPH Trust (BUY, TP US$0.63). 

  • While DPU is projected to be lower at around 4.4 UScts p.a. in FY15 and FY16 from 5.3 US cts in FY14 as HPHT restarts its capital expenditure programme, the stock still offers an attractive yield of c.8% at its current price level. 
  • The upcoming potential final DPS in Feb of 2.4 UScts also presents a good reason to get in early.


Sector Valuations





LIM Sue Lin DBS Vickers | http://www.dbsvickers.com/ 2015-12-17
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.63 Same 0.63
BUY Maintain BUY 1.45 Same 1.45
HOLD Maintain HOLD 1.00 Same 1.00
FULLY VALUED Maintain FULLY VALUED 1.24 Same 1.24
HOLD Maintain HOLD 3.00 Same 3.00
HOLD Maintain HOLD 3.84 Same 3.84
BUY Maintain BUY 3.60 Same 3.60


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