Singapore Aviation - UOB Kay Hian 2016-01-06: Positioning For Things To Come. Focus On SATS And SIA.

Singapore Aviation - UOB Kay Hian 2016-01-06: Positioning For Things To Come. Focus On SATS And SIA. SIA SINGAPORE AIRLINES LTD C6L.SI  SIA ENGINEERING CO LTD S59.SI  SATS LTD S58.SI  ST ENGINEERING SINGAPORE TECH ENGINEERING LTD S63.SI 

Aviation – Singapore :Positioning For Things To Come. Focus On SATS And SIA. 

  • In 2015, Tigerair and SATS were outperformers, recording total returns of 55% and 31% respectively. 
  • In 2016, we expect SATS to generate 17% returns (net of dividend). 
  • We also expect SIA to generate total returns of 13% in 2016 and we would be buyers of SIA at S$10.80
  • Meanwhile, SIAEC remains a SELL due to the increasingly competitive landscape and high valuations. 
  • Maintain MARKET WEIGHT. 


• Strategy - BUY SATS and SIA on weakness. 

  • SATS remains our top pick within the Singapore aviation space and we expect the stock to generate 17% returns (net of dividend) for 2016. Catalysts are improved earnings from subsidiary TFK, cost savings as well as incentives from Changi Airport. 
  • We also favour SIA on expectations of lower fuel hedging losses and stable yields. 
  • SIA is expected to generate 13% returns for 2016 (inclusive of dividend). We would be buyers of SIA near S$10.80. 
  • Meanwhile, SIAEC remains the top sell within the sector. While its stock price is supported by a stock buyback, we expect the stock to underperform. 

SATS: 


TFK likely to turn around from improving visitor arrivals and commencement of Delta Airline contract. 

  • Visitor arrivals to Japan in October and November rose 44% and 41% respectively, underpinned by a 100% and 75% rise in Chinese visitor arrivals. 
  • We expect the increased volume to flow through to a higher number of meals served and hence boost profits. In addition, the commencement of the Delta Airlines catering contract in September will lead to improved profitability. 
  • Earnings could receive a further boost when the new bullet train linking Tokyo to Hokkaido (Hokkaido Shinkansen Line) opens in Mar-16, boosting visitor arrivals at Narita Airport and Haneda Airport (TFK operates out of Narita and Haneda). 

Risk: 

  • Wage pressures. 

SIA: 


We expect 2HFY16 and FY17 profitability to improve on the back of: 

  1. savings from lower fuel costs, 
  2. potentially stable yield, and 
  3. improving load factors. 
  • SIA’s fuel hedges are expected to be added at progressively lower levels and every US$10/bbl difference in fuel price will lead to S$570m in cost savings. In addition, we believe that pressure on yields is likely to erode in the coming quarters as volatility on fuel prices have narrowed. 

Strategic revenue sharing codeshares could boost traffic and potentially yields. 

  • In particular, the recent codeshare with Lufthansa should help to fend off competition from the Gulf carriers and enable SIA to tap into Lufthansa’s network to over 20 points in Europe via the Frankfurt, Munich and Zurich hubs. We believe this would boost loads to Europe. We also note that SIA’s pax load factors have risen for five consecutive months. 

We raise our FY16 net profit estimate for SIA by 13%....

  • .. as we factor in a S$136m reversal in European Commission antitrust fines for cargo price fixing (€75m). We have not assumed a payout of the reversal in fines. In addition, we have assumed that SIA would issue 12.5m new shares, following the exercise of share options by Tigerair shareholders. 
  • At current levels, SIA offers an attractive dividend yield of 4.7%. Our FY16 earnings estimate is the highest in the street, while our FY17 estimate is 29% above consensus. 

Risk: 

  • Greater-than-expected pax yield decline. 

• SIA Engineering: 


Increased competitive pressure likely to result in decline in 2HFY16 and FY17 earnings. 

  • Post the Rolls-Royce JV restructuring, SIAEC lost its status as the sole Centre of Excellence in Asia Pacific for the maintenance of Trent engines. 
  • In addition, we expect SIAEC’s airframe maintenance revenue to decline further due to additional capacity from third-party maintenance, repair and overhaul (MRO) providers in the Philippines and Indonesia. For instance, GMF AeroAsia added a hangar in Jakarta in November, which can accommodate 15 narrowbody/7 widebody aircraft. 

Risk: 

  • Lower-than-expected staff costs and higher-than-expected quantum of work from SIA.



K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-06
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 12.00 Same 12.00
SELL Maintain SELL 3.30 Same 3.30
BUY Maintain BUY 4.50 Same 4.50
HOLD Maintain HOLD 3.25 Same 3.25


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