Singapore Travel & Hospitality - OCBC Investment 2020-01-24: Sentiment Turns Cautious

Singapore Travel and Hospitality - OCBC Investment | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:HMN) SINGAPORE AIRLINES LTD (SGX:C6L) SATS LTD. (SGX:S58)

Singapore Travel and Hospitality - Sentiment Turns Cautious

  • Tourism related stocks likely to be first hit.
  • Chinese government imposed travel ban.
  • Near-term volatility given uncertain outlook.

Sentiment turns cautious

  • We have seen some price weakness on the tourism-related stocks under our coverage this week. The decline could be largely due to the confirmation of human-to-human transmission of Wuhan coronavirus by the Chinese authorities and the rise in confirmed and suspicious cases of the coronavirus in China and globally. Based on the experiences during SARS crisis, should there be an outbreak of virus, tourism-related stocks such as travel and hospitality stocks are likely to be first hit as people tend to be cautious and delay their travel plans. As of 23 Jan 2020, there are 28 suspected cases seen in Singapore, and 1 confirmed case. The Chinese government announced the close-off of 8 cities in Hubei, a more proactive measure which was not taken during SARS crisis.
  • We do see the potential outbreak of Wuhan coronavirus in Singapore, and expect to see near-term volatility should this happen, but believe that the market should be more resilient this time round given the SARS experience, and the authorities are also better prepared now. Should the travel ban imposed by Chinese government effectively control the spread of coronavirus, we would see the impact on the travel and hospitality sectors be shorter and lesser.
  • We remain constructive on the Singapore Hospitality sector and SINGAPORE AIRLINES (SIA, SGX:C6L) over the long-term but remain cautious in the near-term. We also remain cautious on SATS (SGX:S58) given its weak cargo volumes and soft operating margins.

Airlines: weaker demand could weigh on performance

  • We believe that the worries over a disease outbreak could weigh on travel demand as travelers would delay their travel plans, which could negatively affect airlines and related stocks. SIA and SATS’ share prices fell 1.9% and 3.6% respectively this week.
  • If the coronavirus situation escalates further into a SARS-like situation, we believe that both companies’ operating performances are likely to come under pressure, weighing on profits. However, we are more positive on SIA over the longer-term given its growth outlook and relatively quick recovery during the SARS period. On the other hand, we remain cautious on SATS given its weak cargo volumes and soft operating margin.
  • Recall that during the SARS outbreak from Nov 2002 to Aug 2003, visitor arrivals to Singapore fell 19.0% y-o-y from 7.6m in 2002 to 6.1m in 2003. The figure, however, quickly recovered and recorded a strong rebound of 36.0% y-o-y growth to 8.3m in 2004.
  • During this period, SIA’s share price dropped 22.4% i.e. 5 months to the trough level in end of April and took another 1.5 months to recover back to pre-SARS level. In 1QFY03 which was SARS’ worst period, SIA reported a steep fall of 45.7% y-o-y in passenger carriage and 18.1 ppt decline in passenger load factor to 57.4%. SIA’s revenue dropped 35% and suffered a net loss of S$312m. Consequently, SIA cut its capacity by over 30%. Remarkably, SIA’s performance recovered fairly quickly once SARS was under control in the next quarter. In 2QFY03, SINGAPORE AIRLINES returned to profit. Net profit was 3.6% higher y-o-y. Passenger carriage also improved 80% q-o-q/-9% y-o-y while passenger load factor rebounded to 79.4, which was 1.3 ppt higher than the same period last year.
  • As for SATS, 2002-2003 was also seen as a challenging period, which was severely affected by SARS and the weak macroeconomic environment. During this period, the share price dropped 15% i.e. 5 months to the trough level in mid-April and took another 1 month to recover back to its pre-SARS level. In FY03, SATS reported a dramatic drop in passengers handled (-15.9% y-o-y), meals catered (-11.1% y-o-y) and passengers served (-13.2% y-o-y). FY03 PATMI fell 11.6% and revenue declined 9.3%, partially aided by the strong recovery in traffic volume in the 2HFY03 (i.e Oct 2003-Mar 2004).

Hospitality Sector: Slower RevPAR pickup

  • Hospitality REITS under our coverage experienced a decline in share prices this week e.g. -5.2% for FAR EAST HOSPITALITY TRUST (SGX:Q5T), -1.2% for CDL HOSPITALITY TRUSTS (SGX:J85) and -0.7% for ASCOTT RESIDENCE TRUST (SGX:HMN). The impact is limited so far with the exception of FAR EAST HOSPITALITY TRUST which was down 5.2% since 20 Jan, partly due to profit-taking. See S-REIT share price performance.
  • Recall that during the worse period of the SARS outbreak in 2003, hotel occupancy plummeted 32.3 ppt to 42.4% in Q2, but soon recovered to 73.6% in Q3 after the situation improved and returned to the pre-SARS level of 77.0% in Q4. In terms of average room rate, it dropped 17% from S$126 in Oct 2002 (before the first case of SARS was reported in Nov 2002) to the lowest rate of S$105.2 in May 2003. In contrast to the quick rebound of visitor arrivals and occupancy, average room rate remained soft and took longer to recover to the pre-SARS rate.
  • Looking at the sector as a whole, we still expect RevPAR pickup in 4Q19 but could potentially see a slower pickup or even negative RevPAR growth in 2020 should the travel ban fail to control the virus spread and the situation further escalates. However, given
    1. a more resilient market this time with more advanced controls and experience from the SARS crisis,
    2. benign room supply which is expected to grow at a lower CAGR of 1.3% for the next 4 years, and
    3. a number of biennial events in Singapore this year, we remain constructive on the hospitality sector.
  • Our top pick remains ASCOTT RESIDENCE TRUST (SGX:HMN) [BUY; FV: S$1.41]. We like ASCOTT RESIDENCE TRUST’s geographically diversified portfolio of high quality assets, and view its defensive positioning favourably, given the still uncertain outlook.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-01-24
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