Transport Sector - CGS-CIMB Research 2019-05-21: OVERWEIGHT

SINGAPORE AIRLINES LTD (SGX:C6L) COMFORTDELGRO CORPORATION LTD (SGX:C52) SATS LTD. (SGX:S58)

Transport Sector - OVERWEIGHT

SINGAPORE AIRLINES LTD (SIA, SGX:C6L): The airline group has been successful in pushing up revenue per unit of available seat kilometre (ASK) capacity, by reducing ticket prices but generating a positive demand response that more than offsets the lower prices. If the SIA group continues to execute successfully on its new revenue management system, it will be able to at least partially offset the fuel cost increases.
Limiting disruption from ride-hailing unicorns. This could be introduced through a new upcoming regulatory framework that has yet to be finalised from the Land Transport Authority (LTA). Possible competition segregation between taxis and ride-hailing platforms could help to protect COMFORTDELGRO (SGX:C52)’s taxi earnings from further erosion in Singapore.

Earnings-accretive M&As. Leveraging on its near-zero net gearing and S$800m debt headroom, ComfortDelGro could pursue further growth through acquisitions that could add on its c.S$470m acquisitions made in FY18.
SATS LTD. (SGX:S58)’s aggressive efforts to look out for M&As to boost organic growth could bear fruit.

Singapore Airlines: Jet fuel prices have been trading above US$80/bbl for the past few weeks, higher than our spot price assumption of US$75/bbl for FY3/20F, due to geopolitical tensions in the Middle East amid voluntary supply curbs by Saudi Arabia, and other members of OPEC and Russia, as well as US sanctions on Iran and Venezuela. In addition, as trade tensions between the US and China escalate, we expect airfreight demand to continue declining, which may eventually affect demand for business-class travel.
Intensifying ride-hailing competition could lead to further loss of ComfortDelGro’s taxi drivers to competing firms ahead of LTA’s new upcoming regulatory framework.
SATS’s cargo handling businesses could be affected by a general slowdown in trade volume.

Singapore Airlines: Drop in business demand and slowing airfreight demand may require us to cut our earnings forecasts in the next two quarters.
ComfortDelGro’s key earnings cut risk could surface from further contraction of its taxi fleet-size (dipped to under 12,000 as at end-Mar 2019 after six consecutive m-o-m declines) and increasing idle-rate from 3.7% in 1Q19.
SATS: weaker-than-expected cargo handling could impact its gateway associates earnings. We are still factoring +3% y-o-y earnings growth for associates.

We have a Hold recommendation on Singapore Airlines, with a target price of S$10.14, based on 0.9x CY19F P/BV (1 s.d. below mean since 2001). Singapore Airlines’s efforts to improve RASK (by triggering a more-than-compensatory increase in demand in response to lower yields) proving more successful than expected will be a key re-rating catalyst. Downside risks include higher-than-expected jet fuel prices and the heating up of the US-China trade war, which may affect demand for airfreight and eventually spill over into demand for business travel. See report: Singapore Airlines (SIA) - Cyclical Headwinds Ahead?
ComfortDelGro is our preferred pick in the sector. We still expect core EPS growth of 4-9% in CY19-20F, fuelled by M&As. Valuations are also decent at 16x CY20F P/E, backed by 4.5% yield. See report: ComfortDelGro - Still Riding On Robust Public Transport Ahead.