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.
- All 6 companies in our sector offer a prospective dividend yield of at least 3.3% (Singapore Airlines), to as much as 11.4% for Hutchison Port Holdings Trust (SGX:NS8U).
- Meanwhile, two of our top picks ST Engineering and SIA Engineering are offering fairly attractive prospective dividend yields of 3.9% and 4.6% respectively.
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.
- There were numerous privatisation offers (such as Boardroom and Millennium & Copthorne Hotels) as well as merger offers (OUE COMMERCIAL REIT (SGX:TS0U) with OUE HOSPITALITY TRUST; and FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) with FRASERS COMMERCIAL TRUST (SGX:ND8U)) in 2019 and we are likely to see more of such corporate activities in 2020 as valuations remain conducive.
SIA Engineering (SIA EC) could be a prime privatisation or merger target, while Hutchison Port Holdings Trust may also come into play.
- We believe that SIA Engineering could be privatised by its parent Singapore Airlines, which already has a c. 78% stake in the former, given that SIA Engineering has low float and trading liquidity and little need to tap the equity markets while giving Singapore Airlines time and room to restructure or streamline SIA Engineering as needed. A merger between SIA Engineering and ST Aerospace should also not be ruled out.
- Meanwhile, Hutchison Port Holdings Trust is now trading at an all-time low and investors could be looking towards Hutchison Port Holdings to take it private, as the Kuok Group did with PACC Offshore Services Holdings (POSH, SGX:U6C) recently.
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).
- We like Singapore Airlines and have higher-than-consensus earnings forecasts as we are positive on Singapore Airlines’s transformation programme paying off.
- While parent airline SIA continues to enjoy the fruits of the transformation programme in the form of higher revenue per ASK (RASK) and firmer revenues, the weaker-than-expected performances of SIA Cargo, Silkair and Scoot will drag Singapore Airlines’s earnings recovery to be at a more moderate pace than expected. We project the company’s FYE Mar ’21 EPS to improve by 13.5% y-o-y.
- The stock is trading at 0.9x FY20 P/BV, which we see as attractive with ROE projected to rebound to 6.8% by FY21.
- See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.
SIA ENGINEERING (SGX:S59) (Rating: BUY, Target Price: $3.30).
- We see several promising earnings drivers like:
- further expansion in SIA Engineering’s core operating margin, bolstered by cost-cutting initiatives and progress in its transformation programme,
- increased workload at its engine shops owing to persistent problems with the Trent-1000 engines,
- recovery in associate/JV profits from the low in 1HFY20 as start-up costs related to new engine capabilities have mostly been accounted for, and
- a boost in maintenance work volumes due to delays in retiring older aircraft following the protracted global grounding of the B737 MAX aircraft.
- While privatisation remains a crucial catalyst for the stock, the current valuation for SIA Engineering is attractive at close to multi-year lows at about 17x forward PE and dividend yield is healthy at 4.3%.
- See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.
ST ENGINEERING (SGX:S63) (Rating: BUY, Target Price: S$3.50).
- ST Engineering ended 3Q19 with another record-high orderbook of S$15.9bn, underpinning healthy growth prospects in the near-to-medium term. We continue to like ST Engineering for:
- strong inorganic growth potential from recent acquisitions, plus
- near-term organic growth driven by an increase in workload at engine MRO shops, ramp-up of Airbus’s Passenger-to-Freighter programme and margin improvement in the Marine division; and
- medium-to long-term growth from Smart City and IoT-related products and contracts, as well as robotics and automation solutions in transport, logistics, healthcare and hospitality domains.
- Dividend yield is at a decent 3.7% and we expect the stock to remain on investors’ radar amid the uncertain market environment.
- See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.
Paul YONG CFA
DBS Group Research
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Suvro Sarkar
DBS Research
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Andy SIM CFA
DBS Research
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https://www.dbsvickers.com/
2019-12-12
SGX Stock
Analyst Report
3.300
SAME
3.300
10.400
SAME
10.400
4.640
SAME
4.640
0.230
SAME
0.230
2.480
SAME
2.480
