Airlines and Aviation Services

Kim Eng on 8 Mar 2013

Airlines’ outlook challenging, go for stability in services. 4Q2012 for airlines and aviation services revealed slightly disappointing results given expectations of a seasonal peak factor. In particular, airlines such as SIA still showed weakness in yields and high breakeven load factors, with management citing continued competitive challenges ahead. We advise investors to stick with the aviation services sector for its stability in earnings and healthy dividend yields of ~5% p.a. Our top pick remains ST Engineering, with its SGD12b orderbook providing clear earnings visibility in the industry’s uncertain times.

Tiger: one cash call too many? While Tiger’s cash call was not entirely out of left field due to their high gearing levels, its timing seemed to take the market by surprise. The Australian Competition and Consumer Commission (ACCC) is expected to make a decision in less than a week’s time on Tiger’s divestment of its Australian operations to Virgin Australia, and we had expected no significant corporate actions before then. Due to this ACCC uncertainty, we do think that waiting for a clear decision before re-looking at Tiger would be best.

SIA: remaining in the doldrums. SIA had a forgettable 4th quarter (3QFY3/13), as its passenger yields continue to face pressure (-6% YoY) on the long-haul segment, with breakeven loads kept high at ~80%. We see no reason to hold the stock due to low dividend yields.

ST Engineering: upcoming orderbook catalyst. Our top pick in the aviation services segment remains ST Engineering, which we believe its share price will be catalysed by another record orderbook announcement for 1Q2013. SATS and SIA Engineering, while still providing investors with good dividend yields of ~5% p.a, are unlikely to see much more upside due to stretched valuations at 1 SD above historical mean PERs.

Stick with Aviation Services. In light of continued competitive pressures on airlines, especially full-service carriers like SIA, we reiterate our preference for the aviation services segment instead. Steady earnings and healthy dividend yields (~5% p.a.) for companies like ST Engineering point the way forward in times when airlines are undergoing a period of turbulence and consolidation.