SINGAPORE (Feb 4): UOB Kay Hian has downgraded the aviation sector to “underweight” as rising fears of the novel coronavirus outbreak have led to numerous flight cancellations and capacity cuts.
This comes as holders of Chinese passports and foreigners who have recently travelled to China were banned from entering Singapore.
Among the aviation stocks that could be the substantially hit is national flag carrier Singapore Airlines (SIA), which has reduced the number of flights to many parts of China.
UOB Kay Hian reckons that SIA could swing into a loss in 4QFY20 as the airline’s passenger traffic is expected to decline 10% from February to end-March.
Moreover, passenger traffic at its subsidiary airlines – SilkAir and Scoot – are expected to fall by a “greater quantum” as the carriers have a larger share of flight capacity to China.
In addition, SIA’s yields could be affected due to a decline in corporate travel.
See also: BioNTech beats estimates as vaccine maker pursues more diseases
SIA aside, in-flight catering service provider SATS is also not spared.
This is because China accounts for 11% of the company’s revenue and that of its associates, while its net profit contribution from the China also constituted 11% of earnings for 2QFY20, the brokerage notes.
This should lead to lower food solutions revenue as a result of a decline in passenger throughput and flight movements at Changi Airport, it says.
See also: Covid-19 global health emergency is over after three years: WHO
SATS’ revenue from handling air cargo should also be hit in February and March given that the delay in the opening of Chinese factories will affect the global supply chain, it adds.
UOB Kay Hian has cut its FY20 earnings forecast for SATS by 13% y-o-y and lowered the latter’s 2HFY20 earnings forecast by 21% y-o-y.
“SATS and SIA would be most impacted,” UOB Kay Hian analyst K Ajith writes in a note dated Feb 4.
Aircraft maintenance, repair and overhaul service provider SIA Engineering, on the other hand, could be less impacted by the coronavirus outbreak.
Although fewer flight arrivals at Changi Airport could hit the company’s performance, UOB Kay Hian believes that the former’s cost savings initiatives could buffer the impact of lower revenue in 2HFY20.
The brokerage does not expect the company to sink into a loss in 4QFY20 despite smaller margins.
UOB Kay Hian has a “hold” rating for both SIA and SATS, with target price of $9.10 and $4.80, respectively.
But it has a “buy” recommendation for SIA Engineering with target price of $3.13.
As at 4.09 pm, SIA traded up 7 cents or 0.8% at $8.56, while SIA Engineering was flat at $2.58. SATS fell 2 cents or 0.5% at $4.47.
