- Maintain SELL and TP of SGD4.20 (20x FY3/15E P/E). Changi Airport’s flight traffic shrank 2.6% YoY in July. Worsening pressure on MRO demand.
- MAS could accelerate the retirement of its B777s to focus on regional routes, in our view. SAESL’s workload to be hit.
- Rich valuations yet to price in coming slowdown.
Recent signs of deteriorating business conditions include:
- Further decline in Changi’s traffic. Airline capacity at Changi Airport continued to soften, with flight traffic down 2.6% YoY in July. As airline capacity changes are good leading indicators of MRO demand, we see intensifying pressure on SIAEC’s business. Amid regional overcapacity, airlines are unlikely to add meaningful capacity. Furthermore, unlike the opening of integrated resorts in early 2010 that powered a post-GFC traffic recovery, no similar impetus is on the horizon this time around.
- MAS’s restructuring. Khazanah recently highlighted that Malaysia Airlines (MAS) will rationalise its network to focus on regional routes. The airline will reconfigure its fleet accordingly. This could mean an accelerated retirement of its B777s, used primarily on long-haul routes. If so, SAESL’s workload could be affected, as it is the engine shop for these aircraft.
Despite the above negative developments, the stock has bounced off its recent low of SGD4.51, now trading at 22x FY3/15E P/E. This is not justified, in our view. We believe the market has not priced in its impending slowdown, with the spectre of earnings disappointments ahead. Maintain SELL and TP of SGD4.20, set at 20x FY3/15E P/E, 1 SD above its 10-year average.
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