Transport Sector 2020 Outlook & Strategy - DBS Research 2019-12-12: Decent Growth & Yields

Transport Sector 2020 Outlook & Strategy - DBS Research | SGinvestors.io SIA ENGINEERING CO LTD (SGX:S59) SINGAPORE AIRLINES LTD (SGX:C6L) SINGAPORE TECH ENGINEERING LTD (SGX:S63) HUTCHISON PORT HOLDINGS TRUST (SGX:NS8U) COMFORTDELGRO CORPORATION LTD (SGX:C52)

Transport Sector 2020 Outlook & Strategy - Decent Growth & Yields

  • In a low-growth environment, we favour names that have a defensive or resilient business model that also provide an attractive and sustainable dividend yield.
  • A relatively benign oil price outlook could provide breathing room for companies to better execute their business strategies.
  • Watch out for potential privatisations or mergers.
  • Our top picks are ST ENGINEERING (SGX:S63) (BUY, Target Price: S$4.64), SIA ENGINEERING (SGX:S59) (BUY, Target Price: S$3.30) and SINGAPORE AIRLINES (SGX:C6L) (BUY, Target Price: S$10.40).



Decent yields coupled with decent growth


Yield of over 4% on offer across the sector.


Modest earnings growth on modest economic recovery.

  • We are cautiously optimistic that global economic growth is bottoming out and that we are likely see a modest recovery in 2020, the strength of which would depend on potential outcomes in the US-China trade talks, Brexit, and monetary policies.
  • On a simple average basis, the sector is projected to post a modest 6.8% y-o-y CAGR in EPS from 2018-2020F against a simple average FY20F PE of 14.9x.


Could a privatisation or merger be on the cards?


2019 was a year of privatisations and mergers.


SIA Engineering (SIA EC) could be a prime privatisation or merger target, while Hutchison Port Holdings Trust may also come into play.



Risks and Catalysts


Significantly higher oil prices would directly impact Singapore Airlines and Hutchison Port Holdings Trust.

  • Fuel costs (after hedging) currently account for c.30% of Singapore Airlines’s operating costs while we estimate that energy costs account for about 15% of Hutchison Port Holdings Trust’s total operating costs. As such, an increase in fuel prices would pressure the margins of these two players, especially as both do not have significant pricing power. However, should oil prices fall significantly, this will help Singapore Airlines and Hutchison Port Holdings Trust.
  • DBS forecasts brent crude to average US$60-US$65 per barrel in 2020F compared to an average of c. US$64 in 2019.

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, which will help improve the companies’ profitability.


Valuations and Stock Picks

  • Our 2020 top picks are:

SINGAPORE AIRLINES (SGX:C6L) (Rating: BUY, Target Price S$10.40).


SIA ENGINEERING (SGX:S59) (Rating: BUY, Target Price: $3.30).


ST ENGINEERING (SGX:S63) (Rating: BUY, Target Price: S$3.50).






Paul YONG CFA DBS Group Research | Suvro Sarkar DBS Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 3.300 SAME 3.300
BUY MAINTAIN BUY 10.400 SAME 10.400
BUY MAINTAIN BUY 4.640 SAME 4.640
HOLD MAINTAIN HOLD 0.230 SAME 0.230
HOLD MAINTAIN HOLD 2.480 SAME 2.480



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