Despite general economic improvements, the counters within the transportation sector failed to perform well in 2013 due to industry-specific challenges and issues (e.g. sustained competitive pressures in the aviation sector, demand-supply imbalance for the shipping sector, lack of fare increases for the land transportation sector). With some of these issues unlikely to be resolved in 2014, we are downgrading the overall sector to UNDERWEIGHT and expect investor interest to remain tepid. Out of the counters in our coverage, our top pick is ComfortDelgro, rated BUY with a fair value estimate of S$2.20, as we favour its diversified and stable earnings stream, attractive overseas operations, and strong domestic leadership in the taxi and bus segments.
Sector performed poorly in 2013
Despite general improvements in overall investor sentiment, transportation-related counters took a hit in 2013. The aviation sector remained bogged down by intense competition across both premium and budget segments while the absence of a fare review for the local land transportation sector limited investor interest. Bucking the trend, aviation service providers fared decently well due to their stable earnings profile and regular dividend payouts, which helped to sustain investor interest in the low-yield environment.
UNDERWEIGHT aviation
Entering CY2014, we downgrade the aviation sector to UNDERWEIGHT. While the overall economy should improve, competitive pressures amongst the carriers – both in the premium and LCC segments – will results in overall lower passenger yields and reduced profitability. Within our coverage, we maintain no preference for either Singapore Airlines [SELL; FV: S$9.50] or Tiger Airways [HOLD; FV: S$0.55]. The former still relies on promotional fares to stimulate demand and capacity increases have placed pressure on load factors and yield while the latter face downside risk from continued losses by its associate airlines.
NEUTRAL on aviation service providers
We remain NEUTRAL on the sub-sector of aviation service providers for 2014. While we believe that the long term outlook for the topline of the sub-sector is positive, we believe that the positives have been largely priced in. We also note that labor costs pressures have been rising, most noticeably for SIAEC. Based on valuations, we have HOLDs on SATS [HOLD; FV: S$3.35], SIA Engineering [HOLD; FV: S$5.14], and ST Engineering [HOLD; FV: S$4.32].
UNDERWEIGHT shipping
With significant operating challenges likely to linger in 2014 and the persistence of a demand-supply cap, we deem it too premature to call for an inflection point for the sector. Although the overall economic climate should improve, capacity overhang and lack of industry action should see liners suffer from lower freight rates. Therefore, we UNDERWEIGHT the shipping sector and keep our SELL rating on Neptune Orient Lines [SELL; FV: S$0.95]
NEUTRAL on land transportation
We are anticipating a decent fare increase of 3% for the land transport operators, which should help to relieve some pressure on operating margins. However, overall challenges still remain unless there are changes to the operating framework. As such, we maintain our NEUTRAL outlook on the land transportation sector. In terms of our coverage, we prefer ComfortDelgro [BUY; FV:S$2.20] over SMRT [HOLD; FV:S$1.30]. The former because of its better growth potential both locally and abroad, while the latter will see operating results remain under pressure due to the on-going rail rejuvenation programmes.
Despite general improvements in overall investor sentiment, transportation-related counters took a hit in 2013. The aviation sector remained bogged down by intense competition across both premium and budget segments while the absence of a fare review for the local land transportation sector limited investor interest. Bucking the trend, aviation service providers fared decently well due to their stable earnings profile and regular dividend payouts, which helped to sustain investor interest in the low-yield environment.
UNDERWEIGHT aviation
Entering CY2014, we downgrade the aviation sector to UNDERWEIGHT. While the overall economy should improve, competitive pressures amongst the carriers – both in the premium and LCC segments – will results in overall lower passenger yields and reduced profitability. Within our coverage, we maintain no preference for either Singapore Airlines [SELL; FV: S$9.50] or Tiger Airways [HOLD; FV: S$0.55]. The former still relies on promotional fares to stimulate demand and capacity increases have placed pressure on load factors and yield while the latter face downside risk from continued losses by its associate airlines.
NEUTRAL on aviation service providers
We remain NEUTRAL on the sub-sector of aviation service providers for 2014. While we believe that the long term outlook for the topline of the sub-sector is positive, we believe that the positives have been largely priced in. We also note that labor costs pressures have been rising, most noticeably for SIAEC. Based on valuations, we have HOLDs on SATS [HOLD; FV: S$3.35], SIA Engineering [HOLD; FV: S$5.14], and ST Engineering [HOLD; FV: S$4.32].
UNDERWEIGHT shipping
With significant operating challenges likely to linger in 2014 and the persistence of a demand-supply cap, we deem it too premature to call for an inflection point for the sector. Although the overall economic climate should improve, capacity overhang and lack of industry action should see liners suffer from lower freight rates. Therefore, we UNDERWEIGHT the shipping sector and keep our SELL rating on Neptune Orient Lines [SELL; FV: S$0.95]
NEUTRAL on land transportation
We are anticipating a decent fare increase of 3% for the land transport operators, which should help to relieve some pressure on operating margins. However, overall challenges still remain unless there are changes to the operating framework. As such, we maintain our NEUTRAL outlook on the land transportation sector. In terms of our coverage, we prefer ComfortDelgro [BUY; FV:S$2.20] over SMRT [HOLD; FV:S$1.30]. The former because of its better growth potential both locally and abroad, while the latter will see operating results remain under pressure due to the on-going rail rejuvenation programmes.
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