UOB Kay Hian analyst Roy Chen is maintaining his “market weight” rating on Singapore’s aviation sector in light of a slow but continued increase in the nation’s air traffic for FY2024.
In his Dec 11 report, Chen notes the increase of Singapore’s air traffic recovery being more driven by Singaporeans travelling overseas, which have “ already exceeded pre-pandemic levels at 105% to 110% in 10MFY23.
He writes: “Passenger (pax) traffic at Changi Airport recovered to 91% of the pre-pandemic levels as of October.”
The number of foreign visitors to the city-state has also slowly but surely been recovering at less than 80% of pre-pandemic levels, except for Chinese visitors, who are currently only at about 50% of pre-pandemic levels.
“Before the pandemic, China was Singapore’s largest source market of international visitors, forming 19% of total international visitor arrivals to Singapore in 2019. In 10MFY2023, China’s contribution to total international visitor arrivals to Singapore declined to 10%, overtaken by Indonesia’s 16.6%,” notes the analyst.
Chen understands that Singapore and China’s establishment of a mutual 30-day visa exemption arrangement for the two countries’ nationals will “seek to push travel back” to and “beyond” pre-pandemic levels, and will be implemented in early FY2024.
“We see the new mutual visa-free arrangement as a major positive for the Singapore aviation sector,” writes the analyst.
Currently, Singaporeans are able to enter China for up to 15 days visa-free while Chinese nationals coming to Singapore need to apply for a visa.
Outlook
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Although the Singapore-China visa-free arrangement could “turbocharge” the return of Chinese tourists to the island nation, Chen thinks it might be “overly optimistic” to expect an immediate return of pre-pandemic Chinese arrival numbers.
He explains: “China’s current weak economic situation, the scarring effect of the pandemic crisis on Chinese people, financially and emotionally, and the weak renminbi which renders overseas travel more expensive may remain a drag on Chinese citizens’ overseas travel demand in the near term.”
Instead, the analyst expects pre-pandemic Chinese arrival levels to return by end-FY2024, supported by the restoration of flight frequencies.
“We are sanguine that the visa-free scheme with China will raise the sector’s growth prospect in the mid-to-long run,” opines Chen.
Air cargo outlook
Meanwhile, the analyst expects a “moderate pick-up” in international air cargo for FY2024, as the latest leading economic indicators point to more “mixed signals”, already an improvement from the “mostly bearish” signals a few months ago.
In November, the global manufacturing purchasing managers index (PMI) and new export orders index stood at 49.3 and 48.1 respectively, a moderate improvement from October’s 48.8 and 47.5, indicating a slower contraction of global manufacturing and export activities.
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Retail confidence in Europe has “remained weak” in recent months, but consumer sentiment in the US rebounded significantly in December, erasing the declines in the preceding three months. One leading indicator that has turned more favourable is the US total business inventory-to-sales ratio, which has been on a normalising trend since mid-FY2023.
The UOB Kay Hian analyst notes: “We are hopeful that, with another one to two quarters for consumption to pare down inventory stocks further, the US’ inventory restocking may reaccelerate and give rise to a moderate pick-up of global trade demand by mid-FY2024.”
Chen’s calls on the big three
Correspondingly, Chen understands that Singapore aviation companies are expected to release their 3QFY2024 ended Dec 31 results in February FY2024, and has noted his forecasts and calls for Singapore Airlines C6L (SIA), Singapore Airlines Engineering Company (SIAEC) and Singapore Airport Terminal Services (SATS).
SIA
Chen expects SIA’s 3QFY2024 results to come in at $650 million to $770 million, which is “largely comparable” to 2QFY2024’s net profit of $707 million.
His forecast has included an estimated foreign exchange (forex) loss of about $30 million due to the recent depreciation of the US dollar against the Singapore dollar.
“Key factors causing variance to our forecast include SIA’s cost management efficiency and lack of sufficient clarity to accurately estimate SIA’s quarterly fuel cost. We highlight that there remains a meaningful chance that SIA’s 3QFY2024 net profit may match or even exceed the previous quarterly record level of $734 million seen in 1QFY2024,” notes Chen.
As such, the analyst has maintained “hold” at a target price of $6.80, based on 1.26x FY2025 price-to-book (P/B), pegged to one standard deviation (s.d.) above the long-term historical mean of 1.08x.
Chen writes that the one s.d. Peg reflects his “recognition” for SIA’s outstanding operation track record demonstrated during the pandemic crisis and the improved growth prospects from the new visa-free arrangement with China.
Currently, SIA is trading at 1.18x FY2025F P/B, or 0.6 s.d. above its historical mean, with an FY2024 to FY2025 dividend yield of 6%.
SIAEC
Similarly, Chen forecasts SIAEC’s 3QFY2024 net profit to be flat or improve moderately q-o-q, driven by improving line maintenance and maintenance, repair and overhaul (MRO) business volume.
Factors that may cause variance to his forecast include the “lumpiness” of MRO revenue recognition of both consolidated and joint venture (JV) or associate entities.
The analyst has subsequently kept his “buy” call on SIAEC at a raised target price of $2.73, on a rolled over valuation basis to end FY2025.
“We continue to like SIAEC for its market leadership in line maintenance at Changi Airport with about 84% of Changi Airport’s line maintenance business volume, and good earnings recovery prospects driven by rising regional flight activities and MRO service demand,” opines Chen.
Currently, SIAEC’s price implies 15.2x/14.7x FY2025/FY2026 price-to-earnings ratio (PE) including net cash.
SATS
Lastly, Chen forecasts SATS’ 3QFY24 net profit to be in the range of $25 million to $35 million, which is a “meaningful” q-o-q improvement from its 2QFY2024 headline net profit of $22.1 million or core net profit of $6 million, which excludes one-off items.
The analyst notes: “The q-o-q earnings improvement is expected to be driven by improving business volume of both inflight catering and gateway service business, helped by the strong seasonality of year-end holiday travels and festive season consumption.”
Correspondingly, Chen has maintained his “buy” call on SATS at an increased target price of $3.22, based on 16.8x FY2026 PE, and one s.d. below SATS’ historical mean PE of 19.9x.
Notably, the analyst has switched his valuation method for SATS from enterprise value (EV)/adjusted earnings before interests, taxes, depreciation and amortisation(ebitda) to the PE method and rolled over his valuation basis to end-FY2025.
“The below one s.d. P/E peg takes into account the likely higher margin of error for our FY2026 steady-state earnings forecast for SATS,” adds the analyst.
Chen understands that although SATS has been a “laggard” in terms of earnings recovery, he expects its recovery momentum to “gain speed” in FY2024, driven by the continued recovery of regional air traffic and flight activities, as well as the stabilisation and a potential reacceleration of air cargo growth.
He continues: “With a more or less stabilised headcount ramp-up, operating leverage should also kick in and help SATS’ earnings recovery.”
We have switched our valuation method for SATS from EV/adjusted EBITDA to PE method and rolled over our valuation basis to end-FY25. Our updated target price of S$3.22 is now based on 16.8x FY26F PE, 1SD below SATS’ historical mean PE of 19.9x. The -1SD PE peg takes into account the likely higher margin of error for our FY26 (steady-state) earnings forecast for SATS.
Sector catalysts and risks
According to Chen, catalysts for Singapore’s aviation sector include continued air traffic recovery, propelled by Singapore’s new visa-free arrangement with China, and a potential reacceleration of global air cargo growth.
Conversely, risks which may hamper growth include a weak macroeconomy dampening air travel and air cargo demand, inflationary cost pressure, and specifically for SIA, competition catching up faster-than-expected, driving a faster-than-expected moderation of pax yields.
