2019 Outlook & Strategy ~ Transport - DBS Research 2018-11-26: Pick The Right Seat

2019 Outlook & Strategy ~ Transport Sector - DBS Group Research  | SGinvestors.io COMFORTDELGRO CORPORATION LTD (SGX:C52) SINGAPORE TECH ENGINEERING LTD (SGX:S63) SATS LTD. (SGX:S58) CHINA AVIATION OIL(S) CORP LTD (SGX:G92) SINGAPORE AIRLINES LTD (SGX:C6L)

2019 Outlook & Strategy ~ Transport - Pick The Right Seat




Aviation: Volumes higher but yield improvement remains a challenge for SIA


HOLD call for SIA (Target Price S$10.20) as yield expansion lags fuel cost increase.

  • SINGAPORE AIRLINES LTD (SGX:C6L) recently reported 2Q19 earnings that were below our expectations, as passenger yield for the flagship segment declined for a second consecutive quarter despite strong load factors. With fuel prices at a substantially higher level currently, passenger yields need to improve for Singapore Airlines to post returns that are equal to or better than its cost of capital, but this could be a challenging task for SIA given the ongoing stiff competition and US-China trade war situation, which is also beginning to affect the larger global economy.
  • We would turn positive on Singapore Airlines if crude oil prices fall to US$65/bbl and below and hold without travel demand being affected.

SATS (BUY, Target Price S$5.60) to ride on Changi’s long term growth.

  • SATS LTD. (SGX:S58) offers an attractive long term growth story, which is fueled by
    1. passenger and air traffic growth at Changi Terminal 4;
    2. automation and staff productivity driving modest cost increases and better margins in the next few years;
    3. the opening of Terminal 5 by 2030; and
    4. more positive outlook from TFK Japan – with Japan aiming to grow the number of tourists to 40m pax by 2020 and 60m pax by 2040.

CAO (BUY, Target Price S$1.90) is a more attractive proxy for air travel growth.

  • We still like CHINA AVIATION OIL(S) CORP LTD (SGX:G92) given its monopolistic position as the sole importer of bonded jet fuel into China, and for its 33% stake in the exclusive jet fueller SPIA at Shanghai Pudong International Airport.
  • China Aviation Oil has lost over 22% since the start of the year even though its 9MFY18 earnings rose by c.8%. It is now trading at an attractive FY18 PE of 8.4x and FY19 PE of 7.6x.


Defense and MRO: Prefer ST Engineering 


BUY call (Target Price S$4.15) for ST Engineering on robust growth prospects.

  • We like SINGAPORE TECH ENGINEERING LTD (SGX:S63) for a combination of factors:
    1. strong inorganic growth potential from acquisition in the Aerospace segment,
    2. recovery in engine MRO demand and in the longer-term, sizeable contribution from Airbus P2F programmes currently in ramp-up phase,
    3. growing smart city revenues,
    4. remaining in the hunt for potential large contract awards in the US in the future, ranging from postal service trucks to army tanks, and
    5. good progress in the fields of logistics automation and systems integration for electric and autonomous vehicles.

Revenue and margin pressure persists for SIA Engineering, HOLD (Target Price S$2.94).

  • SIA ENGINEERING CO LTD (SGX:S59) continues to face structural headwinds in the form of OEM encroachment in the aftermarket space, longer heavy maintenance cycles for newer aircraft models and keen competition from emerging lower-cost regional competitors. SIA Engineering’s core operating business saw lower utilisation and pricing pressure that eroded its margins in its interim results and we expect core EBIT margins to remain range bound at 4%-5%.
  • With FY19 earnings likely to fall y-o-y and flat dividends at best, we reckon SIA Engineering would not be seen as a safe-haven stock in current volatile market conditions, and recommend looking at ST Engineering instead for a better growth-cum-yield story.


BUY ComfortDelGro for its earnings recovery story


BUY (Target Price S$2.18) for ComfortDelGro as earnings start to recover.

  • We project COMFORTDELGRO CORPORATION LTD (SGX:C52)’s earnings to register y-o-y growth from 4Q18 onwards, and going into FY19F. This is on the back of:
    1. bottoming out in taxi fleet contraction in Singapore;
    2. earnings contribution from recent acquisitions; and
    3. public transport fare increase of 4.3% effective 29 December 2018.
  • As can be seen in its 3Q18 results, while still registering y-o-y declines in profits, the 2Q18 decline is of a smaller magnitude vs 1Q/2Q18, thus indicating sequential improvement. ComfortDelGro also provides a yield of 4.8%/5.2% for FY18F/19F, which we believe is relatively attractive.

HPH Trust continues to disappoint (HOLD, Target Price US$0.24).

  • We are neutral on HUTCHISON PORT HOLDINGS TRUST (SGX:NS8U) despite what seems like an attractive yield of 8.5% for FY18 (declining to 7.5% for FY19), as we anticipate its Hong Kong operations will struggle to improve its profitability significantly. Key challenges include:
    1. the formation of larger shipping alliances being able to negotiate better terms, and
    2. competition remaining stiff in the transshipment business, while the ongoing US-China trade war would further pose a threat to the Trust, whose volumes are entirely derived from the Pearl River Delta, China’s main export region.


Risks and Catalysts


Significantly higher oil prices would impact SIA and HPH Trust directly.

  • Fuel costs (after hedging) currently account for c.30% of Singapore Airlines’ operating costs while we estimate that energy costs account for about 15% of HPH Trust’s total operating costs. As such, a further increase in fuel prices would pressure the margins of both these players, especially when considering that they both do not have significant pricing power. However, should oil prices fall significantly, this will help Singapore Airlines and HPH Trust.

Stronger demand from a pick-up in economic activity could help lift earnings across the sector.

  • A better-than-expected economic growth and activity globally would help improve demand volume and pricing for the transport sector. This should in turn help enhance ROEs, for the last few years.





Paul YONG CFA DBS Group Research | Suvro SARKAR DBS Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2018-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 2.560 SAME 2.560
BUY MAINTAIN BUY 4.150 SAME 4.150
BUY MAINTAIN BUY 5.600 SAME 5.600
BUY MAINTAIN BUY 1.900 SAME 1.900
HOLD MAINTAIN HOLD 10.200 SAME 10.200





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