Singapore Aviation - UOB Kay Hian 2020-02-04: SATS & SIA Most At Risk From Capacity Cuts, But SATS More Vulnerable To Valuation De-rating

Singapore Aviation - UOB Kay Hian Research | SGinvestors.io SINGAPORE AIRLINES LTD (SGX:C6L) SATS LTD. (SGX:S58) SIA ENGINEERING CO LTD (SGX:S59)

Singapore Aviation - SATS & SIA Most At Risk From Capacity Cuts, But SATS More Vulnerable To Valuation De-rating

  • Rising fears on the contagion of the coronavirus have led to numerous flight cancellations and capacity cuts. 80% of SATS’ revenue comes from the aviation sector and labour cost accounts for 53% of opex. We expect SATS (SGX:S58)’s 2HFY20 net profit to decline by 21% y-o-y. Meanwhile, we expect stock price to head toward its 5-year mean PE of 20.6x or about S$4.40, before a price recovery.
  • We also cut SINGAPORE AIRLINES (SGX:C6L)’s FY20 net profit forecast by 29% but its low valuation poses lesser risk.
  • Downgrade to UNDERWEIGHT.



WHAT’S NEW


Singapore suspends visas for Chinese tourists but flights not fully cancelled.

  • We understand that Singapore Airlines will still fly to China to repatriate Singaporeans and permanent residents but we reckon that flights will be cancelled within two weeks. Singapore Airlines’ available seat capacity (ASK) from China to Singapore is estimated to be marginally under 10%. With that, we estimate seat capacity to China to be 12-14% for Changi Airport for 2019.
  • Overall, there is a possibility that traffic at Changi could fall by that quantum over a two-month period. SATS and Singapore Airlines would be most impacted.

SATS: 2HFY20 earnings should show y-o-y decline, but earnings could still rise in FY21 if fears abate and spread of virus is contained.

  • China accounts for 11% of revenue as well as share of revenue of associates. Net profit contribution from the China was similarly 11% of group net profit for 2QFY20. But a decline in pax throughput and flight movements at Changi should lead to lower food solutions revenue as well.
  • The reduction in flight capacity to and from China along with a delay in opening of factories in China will also affect global supply chain. SATS’ revenue from handling air cargo should also be hit during Feb and Mar20. We thus lower our FY20 net profit forecast by 13%, implicitly expecting 2HFY20 earnings to decline by 21% y-o-y.

Singapore Airlines: 4QFY20 earnings could swing into a loss; reduce FY20 net profit by 29% to S$483m.

  • We expect Singapore Airlines’ pax traffic to decline by 10% from February to end-March. SilkAir’s and Scoot’s traffic are expected to decline by a greater quantum as the carriers have a greater share of capacity towards China. Yields could also be affected due to a decline in corporate travel. SIA Group has announced capacity cuts to China.

Lesser flight arrivals at Changi could hit SIA Engineering’s earnings, but cost savings initiatives could buffer the impact of lower revenue in 2HFY20.

  • Line maintenance is a key earnings driver for SIA Engineering (SGX:S59), accounting for the largest operating margin. A decline in flight arrivals, albeit for a 2-3 month period, would still impact margins. However, we do not expect SIA Engineering to swing to a loss in 4QFY20 due to ongoing cost saving initiatives.


ESSENTIALS


SATS: Uncertainty about the duration of the spread of the coronavirus remains the key risk; downgrade to HOLD.


SIA: Maintain HOLD and target price of S$9.10.






K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.100 SAME 9.100
HOLD DOWNGRADE BUY 4.80 DOWN 5.300
BUY MAINTAIN BUY 3.130 SAME 3.130



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