SINGAPORE (Nov 26): Maybank Kim Eng Research is positive on the Singapore aviation services sector for 2020, with a pick up in the number of events in 2020 expected to fuel the sector’s continued outperformance.
The sector has survived the turbulent year so far, marked by weak 1H2019 visitor arrivals, shrinking air cargo volume and unrest in Hong Kong.
Despite the turbulence, ST Engineering (STE), SATS and SIA Engineering (SIAEC) recorded revenue growth for 3Q2019, at 27.2%, 9.8% and 1.3% y-o-y respectively.
“Operating challenges for the first two were defrayed by M&A and market diversification,” said analyst Neel Sinha in a Nov 25 report.
Of the three, only SATS recorded a decline in core profit after taxes and minority interests (PATMI) of 7.6%. STE and SIAEC recorded core PATMI of 32.9% and 17.9% respectively for 3Q2019.
SATS’ decline was attributed to air cargo exposure with Changi and Hong Kong terminals, the loss of Jet Airways, as well as one-off upfront expansion costs in Haneda, Japan and Daxing, Beijing.
SIAEC’s PATMI is ahead of expectations with transformation initiatives of improving cost efficiencies and diversifying service offerings bearing fruit. The company has also improved market share at Changi to 81.6%, and a 2.7% increase in flights handled in Singapore during 2Q2019 and 3Q2019 despite flights at Changi falling 1.2% during the same period.
Of SIAEC’s various new ventures, Sinha believes one that is “expected to start contributing fairly soon” is its associate company with NokScoot for line maintenance of its fleet at Don Muang Airport in Bangkok.
“We think the toe-hold in the Thai market is important and has high growth potential over the medium term,” said Sinha, noting that Bangkok airports alone handle two times the daily flight volume at Changi.
Meanwhile, STE’s growth was driven through various mergers and acquisitions, efficiency improvements and portfolio rationalisation.
STE saw its revenue jump 27% to $2.07 billion for 3Q2019 – the highest year-on-year growth in over a decade. The revenue surge was driven by Aerospace revenue, which soared 53% y-o-y to $1.1 billion on the consolidation of its recently acquired Middle River Aircraft Systems (MRAS), as well as revenue recognised from various end-of-programme reviews.
Notably, SIAEC and SATS have gained market share in their home base of Changi, despite lacklustre figures.
Passenger arrivals edged up only 1.2% in 9M2019, while commercial flights were down 0.9% and cargo volume was down 6.4% y-o-y, suffering from the US-China trade war.
SIAEC is estimated to have gained about 170 basis points for line maintenance during the nine-month period, according to Sinha. SATS, on the other hand, has gained about 50 to 60 basis points in cargo handling, he added.
Sinha opines that all three counters are set to rise with a number of international events landing in Singapore in 2020.
Singapore is one of the top 10 international convention centres hosting 150 to 160 international conferences annually. About 60 to 80 of these are major sector events with over 500 delegates. Within these are biennial events that fall on even-numbered years.
“The Singapore Airshow is the most notable amongst these. The trade show attracts more than 60 of the 100 largest global aerospace, aviation [and] defence firms and 50,000 [plus] delegates from [over] 100 countries. The other large notable biennial conferences are the Global Smart Cities and Environmental summits and the International Water Convention, all scheduled for 2020 as well,” said Sinha.
“We observe that, barring travel disruption related to SARS, Bird flu, average visitor growth during even years outpaced odd years by [about] 2% over the past two decades,” he added.
For these reasons, Maybank is positive on the three counters. The brokerage has “buy” calls on STE, SATS, and SIAEC, with target prices at $4.50, $6.10, and $3.00, respectively.
As at 1pm on Tuesday, ST Engineering is trading 2 cents down at $4.21, SATS is trading 1 cent up at $5.01, and SIA Engineering is trading 1 cent down at $2.84.
