SINGAPORE (Feb 10): AirAsia, Asia Aviation and Cebu Air are DBS’ top buy calls as Asean airlines appear on track for record 2016 performances, says DBS.
However, the outlook for 2017 is less benign as fuel prices trend upwards in tandem with crude oil prices and expects margins to be squeezed from the bottom, says DBS lead analyst Marvin Khor in a Friday report.
While 2017 jet fuel prices are expected to rise 13% to US$60/bbl from 2016’s US$52.9/bbl average and push up the average cost/available-seat-kilometre (ASKs) of airlines, Khor is unfazed by the likely stepdown in airline profits as it comes from a high base.
“We prefer airlines with stronger market shares and thus more flexibility in tweaking the levers (price/volume) to strengthen their position or achieve their desired bottomlines,” adds Khor who also expects capacity growth for most airlines after a general lull in 2015-16, as strong 2016 earnings bolster balance sheets and expansion plans.
“Even those adding fewer aircraft aim to improve volume,” says the analyst, “We think competition is set to rise which will pull down average fares as airlines attempt to drive up or maintain load factors.”
Across the wider sector, Khor prefers AoT to MAHB given the former’s strong earnings growth prospects, which is driven by Thailand’s dynamic tourism sector.
He also liked China Aviation Oil (CAO) as a proxy for China’s firm civil air travel demand growth as well as ST Engineering to SIA Engineering as it has a strong order pipeline to underpin earnings and dividend visibility.
Shares of China Aviation and ST Engineering are trading $1.48 and $3.39 respectively.
