Singapore Aviation - UOB Kay Hian 2017-01-11: Forward Capacity Growth Suggests Lacklustre Prospects For SATS And SIAEC

Singapore Aviation - UOB Kay Hian 2017-01-11: Forward Capacity Growth Suggests Lacklustre Prospects For SATS And SIAEC Aviation Sector Singapore SATS LTD. S58.SI SINGAPORE AIRLINES LTD C6L.SI SIA ENGINEERING CO LTD S59.SI SINGAPORE TECH ENGINEERING LTD S63.SI

Singapore Aviation - Forward Capacity Growth Suggests Lacklustre Prospects For SATS And SIAEC

  • In Nov 16, pax throughput rose by only 3% yoy despite a 14% rise in Chinese pax throughput. 
  • Meanwhile, forward capacity until Jun 17 indicates just 4% growth - half of 1H16’s pax throughput growth. This could have negative implications for SATS and SIA Engineering (SIAEC)
  • Maintain SELL on SIAEC and suggest investors top-slice their holdings on SATS and await better entry levels. 
  • Maintain MARKET WEIGHT.


  • We analyse Changi Airport’s latest pax throughput, the competitive landscape and the impact on SIA, SATS and SIA Engineering.

CAG’s November pax throughput rose just 3.2% in November, vs 8% growth in 1H16. 

  • This was despite Changi Airport Group (CAG) seeing a 13.7% yoy increase in to and from traffic from China. In comparison, Singapore Tourism Board’s (STB) data, (which lags CAG’s by one month), showed a 4% yoy decline in visitor arrivals from China in Oct 16. However, the reversal in Chinese pax numbers was not sufficient to spur a significant increase in Changi’s pax throughput. 
  • As at 11M16, Changi Airport’s pax throughput had risen by 5.7% yoy, while aircraft movements have risen by 4.1% yoy.

A case for slower capacity growth in 2017 as higher fuel prices crimp supply and demand. 

  • According to IATA, Asian carriers’ international capacity rose by 7.9% yoy in Jan-Oct 16 vs 6.5% over the previous period. Part of the increase in capacity was due to the utilisation of fuel-inefficient aircraft that were previously parked. 
  • Low fuel prices had brought some 1,300 of these parked aircraft into operational status. There is a strong possibility that airlines would begin to mothball these aircraft as fuel prices start to rise.
  • As such, capacity is likely to fall, particularly from 2H17 onwards and demand could also fall as airlines attempt to boost yields and loads. In Singapore, forward seat capacity from Jan-Jun 17 shows a 4% cumulative growth, which is half the preceding period’s pax throughput growth of 8%.

SIA’s market share continues to decline, due to a greater shift towards Scoot and Tigerair. 

  • Parent airline SIA’s market share, at 32%, not surprisingly was at its lowest since Nov 06. 
  • Notably, there has been a greater shift towards SIA’s own LCC offerings particularly on Scoot, whose pax throughput has risen by 47% ytd. Inevitably, this will lead to lower group yields.

Potentially negative implications for SATS. 

  • Much of the excitement towards SATS has been on expectations of continued throughput growth at Changi, the resultant operating leverage and positive accretion from automation in pax handling. We believe that the street is estimating greater than a 5% yoy rise in pax throughput for FY18.
  • Forward seat capacity out of Changi according to OAG data points to just a 4% increase in capacity from Jan-Jun 17 vs the 8% increase in pax throughput at Changi in Jan-Jun 2016. Thus, unless load factors improve, there is a strong likelihood that traffic numbers could disappoint and with that, earnings as well. 
  • For FY18, the street is looking at 5% growth in net profit vs our estimate of 0%.


SIA: A weak HOLD; we prefer to buy at closer to S$9.00. 

  • A key positive is that fuel hedging losses are likely to reverse in FY18 and there is a lower risk of steep yield erosion. However, structural challenges persist as the Singapore hub continues to face competition from other the Middle Eastern and Chinese hubs.

SATS: Top-slice and await better entry levels. 

  • We believe there will be limited scope for margin expansion in FY18. The street expects incremental earnings from the opening of T4 in late-17. We doubt that it will be a game changer, except for marginal cost savings. 
  • We expect the stock to head towards S$4.50 by 1H17, supported by a FY17 and FY18 dividend yield of 4.0% and 3.8% respectively.

SIA Engineering could similarly be impacted if flight movements to and from Changi slow down. 

  • SIAEC derives 66% of its revenue from SIA and line maintenance fetches the highest operating margin. Slower rate of capacity additions by SIA group and other airlines at Changi will impact line maintenance revenue, which is a key earnings driver. 
  • Maintain SELL and S$3.30 target price.


  • Higher-than-expected earnings and yields.


  • We have not revised our earnings estimates.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-11
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 4.500 Same 4.500
HOLD Maintain HOLD 10.100 Same 10.100
SELL Maintain SELL 3.300 Same 3.300
BUY Maintain BUY 3.420 Same 3.420