In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. The aviation service providers’ revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. The shipping sector also saw disappointing results as the overcapacity issue continued to put downward pressure on freight rates. We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping Sectors.
2014 has been a poor year
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.
Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.
Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.
Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.
Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.
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