Singapore Aviation Services - Maybank Kim Eng 2019-07-02: YTD 2019 Stats ~ A Mixed Bag

Singapore Aviation Services - Maybank Kim Eng Research | SGinvestors.io SIA ENGINEERING CO LTD (SGX:S59) SATS LTD. (SGX:S58) SINGAPORE TECH ENGINEERING LTD (SGX:S63)

Singapore Aviation Services - YTD 2019 Stats: A Mixed Bag

Visitor arrivals improved but cargo looks ugly

  • SG visitor arrivals rebounded in April led by Greater China, and Changi passenger volumes continued to benefit from the Terminal 4 effect. But YTD May 2019, air cargo volumes had their worst showing since the GFC was the fly in the ointment. That said, we maintain our positive view on the sector.
  • Geographic and service diversification for the companies have provided a level of resilience against domestic market aviation cycles likely not witnessed before.
  • SATS LTD (SGX:S58) is our top pick on a 12 month basis.

SG visitors: A modest recovery in April

  • April saw a reversal of prior two months of growth declines April 2019 visitor arrivals grew 3.4% y-o-y reversing the sharply lower February/March growth rates of 0.5%/(1.2%) bringing YTD arrivals growth to 1.6%.
  • The turnaround in April growth was driven by Greater China arrivals rebounding by 5.2% after a number of weak and volatile months starting Nov-2018, in part driven by the impact of the trade war and a weakening currency, we believe. Mainland visitors that account for c80% of Greater China grew 3.8%.
  • ASEAN, the second largest SG arrivals block, continues to be weak at a 0.4% y-o-y decline for April but improving on the 4.1% y-o-y decline from the prior month. The YTD weakness in ASEAN arrivals at a 1.2% decline has largely been driven by weakness from Indonesia and Thailand markets that account for roughly 55% of ASEAN visitors.

Passenger traffic: Still outpacing visitors YTD

The Terminal 4 effect is still in play

  • YTD passenger traffic at Changi Airport has grown at over 2x the rate of visitor arrivals.
  • We attribute this to Changi Terminal 4, operational since 4Q17, which lifted the hub’s passenger capacity by almost 20m to a total of 85m. It is common to see the effect of utilisation increases at a new terminal boosting more transit traffic last over two years or more.
  • Meanwhile, Jewel Changi, a mixed-use development with gardens and other attractions, opened in April 2019 and should help reinforce Changi’s status as Southeast Asia’s regional air hub. That said, we do note that competition is increasing with expansion at Kuala Lumpur and Bangkok, and upgrading at other regional cities too in recent years. As a result, while overall passenger growth is still on an uptrend, our estimated rate of growth for the transit segment has slowed somewhat in the past couple of years.

Cargo volumes: Falling off a cliff

The worst it has been since GFC

  • April 2019 total air cargo throughput through the Changi hub fell 4.8% y-o-y and the YTD (to May 2019) decline of 5.9% is the worst it has been since the GFC period.
  • This is probably unsurprising in light of data releases earlier this month of Singapore NODX contracting by 9.3% and electronics production similarly down by 4.5%. We believe a part of this air cargo volume contraction relates in part to inventories being wound down given the stated lack of order visibility for the tech downstream sector companies in Singapore and also potentially to the diversion of trade from the US-China trade and tariffs war.
  • While the cargo volume trend looks very bearish, we do note that SATS' gateway services revenue grew 5.5% in 2009 versus the industry contraction of 12% suggesting that its customer base across various airlines provide for some degree of diversification from single sector and market risk – especially as Singapore is a large cargo transshipment hub for the region; more so in volume terms that an end destination market.
  • SATS is exposed to cargo volumes at Changi through its exposure from managing one of Changi’s cargo terminals and we estimate this accounts for 5-7% of revenues at most. ST ENGINEERING (SGX:S63) is exposed to global cargo growth trends from its leading market position as a passenger-to-freighter conversion company for global freight firms like DHL and FedEx. SIA ENGINEERING (SGX:S59) does not have much exposure to the cargo business outside of line maintenance for freighters, which we estimate would be sub-5% of its revenues.

Air traffic: Down too, most likely due to cargo

We believe the flight frequency trend follows cargo declines

  • Commercial flights at Changi were down 2% y-o-y for May, while YTD it stood at a small -0.6% decline.
  • While the data granularity does not include passenger versus cargo aircraft, we would assume that the decline was largely driven by lower cargo aircraft frequency given the collapse in cargo volumes. Moreover, aircraft OEM delivery pipelines indicate a net c2% increase in APAC passenger aircraft fleet in 2019 driven by a c12% net fleet increase for the region’s LCCs.
  • Both SATS and SIA Engineering are exposed to commercial flight frequency at Changi. ST Engineering has no exposure to flight frequency.

Stocks: More than just SG visitor dependent

SATS, SIA Engineering, ST Engineering in declining order of preference

  • Singapore’s aviation services firms are arguably better equipped to deal with visitor volatility than other tourism related segments of hospitality, retail, and entertainment, etc.
  • Perceived to be closely related to visitor activity, SATS' Gateway and SIA Engineering's line maintenance revenues – the variables most closely correlated to Singapore’s visitor arrivals and Changi hub activity - are actually quite resilient to growth downturns. During the six consecutive quarters of visitor declines starting in early 2014 by 0.3-6.1% y-o-y, revenues for these segments grew between 1.1-5.3% y-o-y.
  • SATS' Gateway and SIA Engineering's line maintenance revenues appear quite resilient to Changi passenger growth too, albeit to a lesser extent than visitor volumes.
  • We surmise the factors for this for both companies are:
    • Increasing scope of services with customers given scale advantages;
    • Growing operating fleet in the region mitigating the volatility of visitor and passenger volumes; and
    • Better diversification of Singapore-centric operations in recent years.

Company Reports

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-07-02
SGX Stock Analyst Report BUY MAINTAIN BUY 2.850 SAME 2.850