OCBC Investment Research (OIR) analyst Chu Peng sees the easing of travel restrictions by the US as a “positive step forward”.
The move, she says, will help the recovery of the aviation and tourism sectors, barring the risks of a potential spike in the number of Delta variant cases.
Many regions in Asia Pacific, which have announced plans to move from “zero-Covid” to “living with Covid-19” is seen as another plus for the sector.
That said, it is unlikely for a large scale and significant improvement in cross-border and, or international travel to happen in 2021 and 1H2022, she says.
In her report on Sept 22, Chu also notes that the resurgence in Covid-19 cases around the world due to the Delta variant, has weighed on the performance of airline stocks.
To be sure, the Bloomberg World Airlines index fell 9.75% and 5.2% in the months of June and July respectively.
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Among the airline names under OCBC’s coverage, Chu is positive on selective names within the sector.
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These include Delta Airlines and Southwest Airlines among the US airline names, as well as Air China, SATS and SIA Engineering Company (SIA EC) within Asia.
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“Delta Air Lines is a name to play the next phase of recovery in international and corporate travel. Europe made up 52% of Delta’s international available seat miles in 2019, compared to 43% for peers. With the US’ announcement to reopen borders to 33 countries, including the UK and Europe from November this year, Delta is poised to benefit from a recovery in international travel,” writes Chu.
“On the other hand, Southwest is more of a domestic leisure play which is almost entirely focused on the domestic market,” she adds.
Chu has given Delta and Southwest both “buy” calls with target prices of US$52.50 ($71.04) and US$65.
“Driven by a stronger travel demand, Air China’s net loss narrowed to RMB0.6 billion ($125.67 billion) in 2Q21, the lowest since the onset of the Covid-19 pandemic. In addition, revenue passenger kilometres (RPK) improved 109% y-o-y and passenger load factor was 75% which were the strongest since 2020,” she writes.
“Given prior track record of the Chinese government in handing sporadic cases, we think there is a good chance that the latest outbreak of the Covid-19 pandemic in Fujian could be controlled effectively before the October Golden Week.”
Within China, Chu believes that the demand for domestic travel should remain strong and continue to lead the recovery in 2021 and 2022. However, there is no sign that the government is planning to open its borders despite 76% of the population in Singapore having received at least one dose.
“We expect Air China’s domestic seat capacity to fully recover to 2019 level this year and further increase to [around] 120% of 2019 level in 2022. However, we forecast Air China’s international seat capacity to be only 5% of 2019 level for 2021 and rebound to about 35% in 2022,” she writes.
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In Singapore, the reopening of borders via the vaccinated travel lanes marks a measured start to the resumption of air travel, aiding the recovery of the aviation sector.
That said, she believes visitor arrivals may remain muted in 2021 as vaccination rates and border measures vary in countries.
“A more meaningful recovery is likely to happen in 2H2022 and 2023,” she says.
Chu views SATS as a beneficiary of strong cargo demand and the gradual recovery of air travel with buffer from its non-travel business.
“For SATS’s 1QFY2022, cargo remained the bright spot which grew 13.5% q-o-q due to strong demand from e-Commerce, and temperature sensitive supplies such as vaccines and perishables. On a q-o-q basis, SATS’s flights handled improved 3.7% (at 25% of pre-Covid-19 levels) while passengers handled fell 10%,” she writes.
“As air travel takes time to recover, SATS’s non-travel business could continue to be a key revenue driver which made up 46% of SATS’s total revenue in 1QFY2022. Looking ahead, SATS will continue to grow its non-travel business across Asia and look for acquisition opportunities e.g. cargo handling assets and central kitchens,” she adds.
SIA EC is also another beneficiary once the borders reopen, says Chu, who deems the stock’s valuations undemanding.
The counter is currently trading at a forward price-to-book (P/B) ratio of 1.45 times, which is around 1 standard deviation (s.d.) below its historical average of 2.0 times.
Chu has given “buy” calls for Air China, SATS and SIA EC with target prices of HK$6.50 ($1.13), $4.80 and $2.37 respectively.
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Looking ahead, Chu sees digitalisation as a new way of travel, as the Covid-19 pandemic accelerated technology improvements and digital transformation.
As business environments now use mobile self-serviced capabilities, contactless technology, digital health passports and vaccination visas, Chu believes that the trend would continue.
“Companies which can innovate and adapt quickly to the regulatory requirements and passenger needs will emerge stronger post-Covid-19,” she says.
