Singapore Transport Sector

Maybank Kim Eng Research, June 27

THE impact of haze will not last long; we stay positive on SIA Engineering Company (SIAEC), SATS and ComfortDelGro. The haze, while a yearly affair and the worst ever so far this year, is still likely to be a near-term bump on the road for transportation sector stocks.

Historically, investors have been unfazed by the haze, and we believe that any negative reaction to this presents opportunities to accumulate the undervalued transportation sector stocks that we favour. We reiterate our positive stance on SIAEC ("buy", target price: $6.16), SATS ("buy", TP: $3.90), and ComfortDelGroup ("buy", TP: $2.33).

Indonesia sent Singapore the unwanted "gift" of the worst-polluted air ever last week. The Pollutant Standards Index (PSI) shot up to hazardous levels of more than 400 points on June 21, surpassing the previous peaks of 226 points (September 1997) and 128 points (October 2006).

However, the smoke has subsided just as quickly as it came on the back of shifts in wind direction and, perhaps, prompt government-to- government action. At the time of writing, the pollution index has fallen to 38 and the horizon is visible again.

But what if the haze returns and stays? Bush fires in Indonesia typically occur at this time of the year due to aggressive land clearing operations by local farmers, but the impact this year has been much worse than in previous years.

The air has cleared this week but we have reviewed our earnings forecasts for the transportation stocks in case the situation takes a turn for the worse again.

Singapore Airlines (SIA), SIAEC and SMRT are most exposed. For the land transport stocks, we estimate SMRT and ComfortDelGro would suffer a weekly earnings impact of $2 million and $1.4 million (or 2.0 per cent and 0.5 per cent of annual profit), respectively, for every 15 per cent reduction in fare revenue.

SIA and SIAEC too would be exposed as Singapore is their main operating base, but it is not possible to assess the impact on aviation stock earnings, as there are too many moving parts. Inbound traffic could be hit but this could be compensated for by more outbound traffic.

Historically, there is no impact on stocks as long as haze lasts less than a month. We observed no material adverse reaction during the more severe hazy days of September 1997 and October 2006, which generally lasted about a month.

We remain sanguine about the situation as long as the haze does not last for more than a month this time round too. Using a far worse example to gauge downside, the Sars epidemic impacted aviation stocks by almost 20 per cent at the worst, but land transport stocks were unscathed.