The aviation and shipping sectors saw a weak end to CY14 with mostly disappointing results. The cost savings on lower oil prices expected by most investors have yet to show in 4QCY14 financials due to hedging activities. We continue to hold the view that the aviation sector will still face headwinds from overcapacity in Southeast Asia, putting a downward pressure on yields in 2015. The liner industry is also expected to see depressed yields on overcapacity reasons and higher costs from port congestion in the U.S. Furthermore, the expected slowdown in global economic growth also casts uncertainties over air travel demand and trade volume. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping sectors, with ratings on SIA [HOLD; FV:S$11.59], Tiger Airways [SELL; FV:S$0.29], SIAEC [SELL; FV:S$3.80], STE [HOLD; FV:S$3.33], SATS [HOLD; FV:S$2.98], NOL [HOLD; FVS$1.01].
Review of CY14 results
Singapore Airlines’ (SIA) [HOLD; FV:S$11.59] 9MFY15 core PATMI declined 27.8% YoY from large losses of Tiger Airways (Tigerair) [SELL; FV:S$0.29], strengthening of USD against SGD and large hedging positions that offset decline in fuel costs as well as weaker performance from its associates and JV companies. Tigerair’s 9MFY15 saw a series of impairment charges but excluding one-off items, core bottom-line improved 27.9% YoY, although still in loss position. Tigerair also repaired its balance sheet as it completed a rights issue exercise as part of its turnaround strategy. Singapore Engineering’s (SIAEC) [SELL; FV:S$3.80] 9MFY15 PATMI came in below expectations as it declined 29.2% YoY on lower maintenance checks. Similarly, ST Engineering’s (STE) [HOLD; FV:S$3.33] reported below expectations FY14 results with a 8.4% drop in FY14 net profit. On the other hand, SATS Ltd’s (SATS) [HOLD; FV:S$2.98] 9MFY15 results did better than we expected, as it grew 4.6% YoY on tight cost management, favorable business mix and productivity gains. Finally, for the shipping sector, Neptune Orient Lines Limited (NOL) [HOLD; FV:S$1.01] disappointed with FY14 results slightly below our expectation as net loss widened on depressed yields and volume from its liner segment. However, the focus is now on the proposed sale of NOL’s logistics arm for US$1.2b, which had been the sole positive contributor to NOL’s bottom-line over the past three years.
Maintain UNDERWEIGHT on Aviation Sector
Overcapacity in Southeast Asia is still the major headwind for the aviation sector as it puts a downward pressure on yields. However, we expect to see the easing of overcapacity over the longer-term as airlines delay deliveries of aircraft over the next few years. In Jan-15, IMF cut the growth forecast of world GDP for both CY15 and CY16 by 0.3%, which casts a shadow over the demand for air travel. Consequently, outlook remains muted for the service providers. Hence, we maintainUNDERWEIGHT rating on Aviation Sector.
Maintain UNDERWEIGHT on Shipping Sector
We believe the operating environment in the liner industry is still challenging due to port congestion in the U.S. which leads to higher costs and overcapacity, which casts downward pressure on freight rates. The expected slowdown in world growth also means uncertainty over trade volume. Hence, maintain UNDERWEIGHT on the Shipping Sector with no clear indication of recovery in the near-term.
Singapore Airlines’ (SIA) [HOLD; FV:S$11.59] 9MFY15 core PATMI declined 27.8% YoY from large losses of Tiger Airways (Tigerair) [SELL; FV:S$0.29], strengthening of USD against SGD and large hedging positions that offset decline in fuel costs as well as weaker performance from its associates and JV companies. Tigerair’s 9MFY15 saw a series of impairment charges but excluding one-off items, core bottom-line improved 27.9% YoY, although still in loss position. Tigerair also repaired its balance sheet as it completed a rights issue exercise as part of its turnaround strategy. Singapore Engineering’s (SIAEC) [SELL; FV:S$3.80] 9MFY15 PATMI came in below expectations as it declined 29.2% YoY on lower maintenance checks. Similarly, ST Engineering’s (STE) [HOLD; FV:S$3.33] reported below expectations FY14 results with a 8.4% drop in FY14 net profit. On the other hand, SATS Ltd’s (SATS) [HOLD; FV:S$2.98] 9MFY15 results did better than we expected, as it grew 4.6% YoY on tight cost management, favorable business mix and productivity gains. Finally, for the shipping sector, Neptune Orient Lines Limited (NOL) [HOLD; FV:S$1.01] disappointed with FY14 results slightly below our expectation as net loss widened on depressed yields and volume from its liner segment. However, the focus is now on the proposed sale of NOL’s logistics arm for US$1.2b, which had been the sole positive contributor to NOL’s bottom-line over the past three years.
Maintain UNDERWEIGHT on Aviation Sector
Overcapacity in Southeast Asia is still the major headwind for the aviation sector as it puts a downward pressure on yields. However, we expect to see the easing of overcapacity over the longer-term as airlines delay deliveries of aircraft over the next few years. In Jan-15, IMF cut the growth forecast of world GDP for both CY15 and CY16 by 0.3%, which casts a shadow over the demand for air travel. Consequently, outlook remains muted for the service providers. Hence, we maintainUNDERWEIGHT rating on Aviation Sector.
Maintain UNDERWEIGHT on Shipping Sector
We believe the operating environment in the liner industry is still challenging due to port congestion in the U.S. which leads to higher costs and overcapacity, which casts downward pressure on freight rates. The expected slowdown in world growth also means uncertainty over trade volume. Hence, maintain UNDERWEIGHT on the Shipping Sector with no clear indication of recovery in the near-term.
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