SINGAPORE TECH ENGINEERING LTD (SGX:S63)
SIA ENGINEERING CO LTD (SGX:S59)
SATS LTD. (SGX:S58)
SINGAPORE AIRLINES LTD (SGX:C6L)
COMFORTDELGRO CORPORATION LTD (SGX:C52)
Industrial Sector Outlook - On A Recovery Path
Aviation services seeing growth; O&M is slowly recovering
- The outlook for the aerospace MRO industry looks a lot brighter for 2019-2021 from a combination of factors:
- a tight freighter market and availability of mid-life and older generation aircraft triggering passenger-to freighter conversion work;
- some industry capacity rationalisation;
- strong growth in the global commercial aircraft fleet with deliveries from OEMs Airbus and Boeing at record levels of over 1,500 annually; and
- investment in secondary and tertiary cites airport infrastructure in APAC combined with growth in LCC fleets expanding flight frequency and the roster of destinations. This bodes well for catering, ground handling, cargo management, refueling, aircraft conversions and other peripheral aviation services.
- While we do not currently cover the large O&M companies in Singapore (KEPPEL CORPORATION LIMITED (SGX:BN4) and SEMBCORP MARINE LTD (SGX:S51)), we note from company briefings over the past few quarters that the worst of the customer order cancellation risk and provisions (ex-Sete Brazil) are now likely behind. Additionally both companies have successfully sold off the rigs resulting from customer defaults in 2015/2016.
- Meanwhile, a combination of marketed rig supply shrinking with the scrapping of older rigs and a gradual increase in contract work has driven offshore fleet utilisation levels up to c79% levels at early April 2019, up from c72% levels a year ago. That said, there is still excess capacity in the E&P drilling equipment segment and new order recovery will be slow; yards will need to look for non-drilling solutions to grow in 2019/2020.
ComfortDelGro is back in the comfort zone but valuations are rich
- The acquisition of Uber by Grab in 2018 was a watershed moment in stabilizing cut-throat industry competition; and COMFORTDELGRO CORPORATION LTD (SGX:C52) was the somewhat fortuitous winner from this development. The stock subsequently went on to being one of the best index component performers of 2018 after being one of the worst in 2017. (see Share Price Performance - Straits Times Index STI Constituents)
- While the business has now stabilised and is growing again, the growth is pedestrian and doesn’t justify a further rerating unless the company announces some material growth boost or a special dividend payout.
What could go wrong?
- For aviation related companies like SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63), SATS LTD. (SGX:S58) and SIA ENGINEERING CO LTD (SGX:S59) and SINGAPORE AIRLINES LTD (SGX:C6L) the key risks to profit growth are a macro event, like a global economic shock or unforeseen disease outbreaks, like SARS or Bird Flu that disrupt cross-border travel, and lastly, a sharp spike in oil prices .
- For Singapore Airlines, an added risk is if the US-China trade war materially impacts cargo and passenger load factors.
- For ComfortDelGro, the main downside risk is an increase in competitive intensity again with new disrupters, like Go-Jek from Indonesia entering the market.
Order of preference ST Engineering, SATS, SIA, SIA Engineering
- Target prices based on DCF valuations for ST Engineering, SATS, SIA Engineering and ComfortDelGro and P/BV valuations for Singapore Airlines translate to forward P/E’s that are generally not demanding and lie within c. +/- 0.5sd relative to their respective 5Y means.
- We have BUY ratings on four stocks and our declining order of preference amongst these are: ST Engineering, SATS, Singapore Airlines and SIA Engineering.
- We have a HOLD rating on ComfortDelGro.
Industrial & Transport Sector Valuation Summary
See also
Neel Sinha
Maybank Kim Eng Research
|
Lai Gene Lih
Maybank Kim Eng
|
https://www.maybank-ke.com.sg/
2019-04-17
SGX Stock
Analyst Report
4.250
SAME
4.250
2.850
SAME
2.850
5.800
SAME
5.800
11.200
SAME
11.200
2.450
SAME
2.450
