Singapore Aviation - UOB Kay Hian 2016-04-01: Strong Growth In Changi Airport Bodes Well For SATS, SIA And SIA Engineering In 4QFY16

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: Strong Growth In Changi Airport Bodes Well For SATS, SIA And SIA Engineering In 4QFY16

Changi Airport’s pax throughput surged in Jan-Feb 16.
January’s growth was led by a whopping 56% yoy rise in Chinese visitor arrivals, which saw double-digit growth for 10 consecutive months.
We believe SATS will be the primary beneficiary of what appears to be a trend reversal in visitor arrivals as it has an 80% share of all flights handled and meals served at Changi.

SIA Engineering will also benefit via higher line maintenance checks but its longer-term growth remains at risk.

..., led by visitor arrivals by air in January and likely in February as well. Visitor arrivals by air rose 12.7% yoy in January, in tandem with a 6% yoy rise in aircraft movement.
Data released by Changi Airport Group showed aircraft movement growth in February was even higher at 8% yoy, and this should correspond to strong visitor arrivals by air.

Visitors from China, Indonesia, Australia, Malaysia and India, in descending order, led tourism markets at Changi.
January’s traffic growth was led by a whopping 56% yoy rise in visitor arrivals from China. Visitors from Indonesia, the second largest segment, rose 9% yoy. This could be due to a low base in the aftermath of the Indonesia AirAsia QZ8501 crash in Dec 14. However, this is not the case for Chinese visitors which saw double-digit growth for 10 consecutive months.
Going forward, we expect Changi Airport’s pax throughput to remain buoyant as low air fares and increased airline capacity to regional destinations such as Malaysia, Thailand and Australia, lead to spillover tourist arrivals as well as transit traffic.

We expect SATS (SATS SP/BUY) to be the direct beneficiary of increased pax throughput

With 81% and 79% market share of Changi Airport’s pax throughput and flight movements in 3QFY16 respectively, SATS will be a direct beneficiary of the surge in both pax throughput and flight movements. Both SATS’ unit meals and unit services have high correlations of 78% and 72% to the number of pax handled and flights handled at Changi respectively.
Assuming Changi airport’s pax throughput rises 9% in 1Q16, SATS unit services could rise 11-14% in 4QFY16, which could in turn boost gateway services revenue by 6-7%. This is higher than our implied estimate of a 3% growth in gateway services.
Earnings could thus surprise to the upside. We also believe the market has yet to factor in such an eventuality.

SIA, Silk Air and Scoot’s pax carriage rose 5.6%, 10.8% and 48.1% yoy respectively in 2M16.
SIA and its subsidiary airlines have a 53% market share of Changi and are thus well positioned to benefit from increased travels to Singapore

SIAEC will benefit from higher flight movements at Changi as it has an 80% market share on flights handled out of Changi.
Line maintenance operations also have the highest operating margin within the maintenance, repair and overhaul operations.
While it could still see higher earnings in the latest quarter, we believe its airframe maintenance operations will be impacted by increased competition, delivery of new aircraft as well as from the recent JVs with OEM’s Boeing and Airbus

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-01

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