SATS LTD. (SGX:S58)
SIA ENGINEERING CO LTD (SGX:S59)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
Singapore Aviation - Leaving The Air Pockets Behind
Fuel in the tank to sustain outperformance
- We remain positive on SG aviation services for 2020. The companies have performed well despite the headwinds of weak 1H visitor arrivals, trade-war related shrinking air cargo volume and Hong Kong unrest.
- We expect cargo volumes to bottom over the next couple of quarters, while SG will host a number of ‘even-year’ biennial trade events in 2020 providing fuel for the stocks’ 2019YTD outperformance over FSSTI to be sustained next year.
- We are BUYers of all 3 stocks with SATS (SGX:S58) being our top pick.
Delivering in a challenging environment
ST ENGINEERING (SGX:S63): M&A driven
- 3Q19 was a strong quarter with group revenue posting its highest y-o-y growth in over a decade. Excluding one-off provision and inventory impairment, core PATMI rose 33% y-o-y/25% q-o-q with 9M19 accounting for 79% of our FY19 forecast.
- ST Engineering’s various growth initiatives through M&A, efficiency improvements and portfolio rationalisation appear to be on track. 3Q19 revenue growth of 27% y-o-y was the highest in over a decade driven primarily by the aerospace segment, which saw a 55% y-o-y jump in revenues driven by the consolidation of the MRAS acquisition (which we estimate accounted for 3/4ths of the segment growth), as well as end-of-program reviews which were exceptionally high during the quarter. The other segments saw revenue growth as well with Electronics up 10% y-o-y, Land Systems 3% and Marine 13%.
- Order book stands at a record SGD15.9b with cSGD2.2b expected to be recognised in 4Q19.
- See ST Engineering Announcements; ST Engineering Latest News.
SATS (SGX:S58): Revenues on track but PATMI was weighed by one-offs
- Revenues were slightly ahead of our and the street’s expectations but lower PATMI resulted from upfront one-off costs of expansion in Japan, China, the regional cargo slump, loss of the Jet Airways business due to its bankruptcy and HK unrest disrupting regional passenger traffic flows.
- Gateway revenue grew mainly from the consolidation of GTR (ground handling venture with Air Asia in Malaysia) offsetting the weak cargo market in Singapore (c5.7% drop in cargo volume handled). Food Solutions grew from a combination of the consolidation of SATS BRF, as well as strong 6% growth in its Japan flight kitchens (at Haneda/Narita airports).
- Despite the cargo/HK/Jet issues, 1H core PATMI accounted for 44% of our FY20F forecast, just slightly lower than the c46-47% run rate expected at mid-point of the financial year. Recall that historically SATS’ 3Q (Oct-Dec) is the seasonally strongest quarter.
- See SATS Announcements; SATS Latest News.
SIA ENGINEERING (SGX:S59): Cost, efficiency discipline bearing fruit
- 2Q20 PATMI was slightly ahead of our and the street’s expectations. Transformation initiatives to improve cost efficiencies and diversify its suite of service offerings is starting to show results with revenues relatively stable for the past few quarters and EBIT margins improving since mid-2018.
- We also estimate that SIA Engineering gained c.160bps market share in line maintenance to 81.6% in its home base at Changi. SIA Engineering saw a 2.7% increase in flights handled in Singapore during 1H20 although flights at Changi fell c1.2% during this period. The market share gain was partly through acquisition of new customers like Vistara, Jeju Air starting services to Singapore, and AirAsiaX (AAX MK) increasing flight frequency.
- Also, of SIA Engineering’s various new ventures, one that is expected to start contributing fairly soon is its associate company (49% stake) with NokScoot for line maintenance of its fleet at Don Muang Airport in Bangkok where we think the toe-hold in the Thai market (Bangkok airports alone handle 2x the daily flight volume at Changi) is important and has high growth potential over the medium term.
- See SIA Engineering Announcements; SIA Engineering Latest News.
Gaining some share at Changi
- 9M19 Singapore aviation traffic statistics show growth to be uninspiring. Passenger at Changi were up just up 2.1% y-o-y due to a poor first half when Chinese arrivals (c25% of total) fell due to the weak macro and RMB decline. Meanwhile commercial flights have fallen 0.9% y-o-y and cargo volume down 6.4% y-o-y from the impact of the US-China trade war.
- Notwithstanding the lackluster growth, SIA Engineering and SATS gained some market share in line maintenance and cargo in their 1H20 at their home base Changi.
- We estimate that SIA Engineering gained c170bps market share for line maintenance during the period based on the aircraft handled by the company versus Changi total aircraft volumes.
- Meanwhile SATS gained c50-60bps cargo handling share by our estimates. Management indicated its volumes at Changi fell c5.7% during 1H versus the 7.6% decline at Changi. Note that the reported cargo tonnage drop of just 2.5% for SATS during the period was due to ex-Singapore volumes i.e. from its Malaysian subsidiary GTRH that commenced cargo operations during the recent quarter.
An ‘even-year’ lies ahead; Good for hotels too
- Singapore is one of the top 10 international convention centers globally hosting some 150-160 international conferences annually. Around 60-80 of these, usually conventions and trade shows, are deemed major sector events with over 500 delegates.
- While most of these events are annual occurrences, a few large ones are biennial and typically fall on even-numbered years.
- The Singapore Airshow is the most notable amongst these. The trade show attracts more than 60 of the 100 largest global aerospace/aviation/defense firms and 50,000+ delegates from 100+ countries. The other large notable biennial conferences are the Global Smart Cities and Environmental summits and the International Water Convention, all scheduled for 2020 as well.
- We observe that, barring travel disruption related to SARS, Bird flu, average visitor growth during even years outpaced odd years by c2% over the past two decades.
- Aviation services stocks aside, this is also positive for hotel occupancies where our preferred stocks are CDL Hospitality (CDREIT SP; CMP SGD1.59; TP SGD1.80; BUY) and Far East Hospitality (FEHT SP; CMP SGD0.72; TP 0.80; BUY).
Valuation & Risks
- ST Engineering: Our DCF-based Target Price of SGD4.50 assumes a 7.9% WACC and 2% TGR. See ST Engineering Share Price; ST Engineering Target Price.
- SATS: Our DCF-based Target Price of SGD6.10 assumes a 6.8% WACC 6.8% and 2% TGR. See SATS Share Price; SATS Target Price.
- SIA Engineering: Our DCF-based Target Price of SGD3.00 assumes an 8% WACC and 2% TGR. See SIA Engineering Share Price; SIA Engineering Target Price.
Key risks to our view
- Overall, the top downside risks to our forecasts are a material deterioration in airline industry fundamentals that translate to pricing pressure and intensifying competition. This could be due to a variety of factors, such as intensifying price competition from smaller players struggling with excess capacity or OEMs like Boeing and Airbus encroaching more aggressively in the aftermarket-MRO space.
- Risks specific to the companies are:
- ST Engineering: In the near term, a major disruption in airborne cargo growth driven by the aftermath of a US-China trade war could adversely affect aircraft ST Engineering’s PTF conversion demand. Other risks include execution risks in successfully new acquisitions like MARS, Newtec, a global macro downturn that could force governments to cut back their investments in urban transport and smart city infrastructure, cost pressures from rising commodity prices, and import tariff regimes in its operating markets.
- SATS: Execution risk in SATS’ various new ventures and investments like GTRH, China central kitchens, and market risk for TFK Japan, where, notwithstanding better performance in the past two quarters, the market still has potential overcapacity risks. There is also the risk of rising labour costs and loss of air traffic market share and current positioning of Singapore’s Changi Airport as the leading regional air hub in Southeast Asia due to competition from other regional cities.
- SIA Engineering: Rising labour costs and fleet renewal by airline customers that could reduce line maintenance work by levels more than expected. There is also the risk of worse than expected heavy maintenance workload and fleet management revenues due to loss of customers / market share and loss of air traffic market share and current positioning of Singapore’s Changi Airport as the leading regional air hub in Southeast Asia due to competition from other regional cities.
Neel Sinha
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2019-11-25
SGX Stock
Analyst Report
6.100
SAME
6.100
3.000
SAME
3.000
4.500
SAME
4.500
