Aviation Sector

Aviation Sector: Singapore’s aviation sector continues to be buffeted by intense headwinds as a local broker points to 2Q15 earnings that failed to inspire.

Giving a breakdown of aviation-related companies, the research house remarked that airlines continue to disappoint.

Singapore Airlines (Hold; TP: $11.27) - Uninspiring 1QFY16 results missed estimates after stripping out one-off compensation from Airbus. Notably, revenue fell 3.2% y/y.

Tigerair (Sell; TP: In review) - Continue to bleed in 1QFY16 although losses narrowed to $1.7m due primarily to lower fuel cost and the absence of restructuring expenses.

However, recent operating statistics seem to suggest that passenger load factors (PLFs) are on the mend with SIA and Tigerair reporting an increase Jul PLFs of 84.6% (+2.9ppt) and 85.3% (+2.7ppt) respectively.

That said, the research house is not sanguine about the outlook for airlines as the industry is still plagued by overcapacity especially when Middle Eastern carriers ramp up competition along SIA’s long haul routes.

Tigerair on the other hand, may have limited growth opportunities due to its small scale Singapore-based operations.

Results from aviation service providers were a mixed bag.

ST Engineering (Hold; TP: $3.33): Reported 2Q15 results that were in line even though net profit eased 6.1% y/y to $125m. Revenue (-2.6%) was largely dragged on by its weaker marine segment.

SIA Engineering (Sell; TP: $3.45): 1QFY16 results missed as net profit fell 22.5% y/y partially due a slide in revenue as well as a slump in contributions from engine repair and overhaul centres.

SATS (Hold; TP: $3.78): Remains one of the most resilient and stable counters within the sector. as 1QFY16’s core net profit was largely met expectations, buoyed by operational improvements.

The research house notes that SATS’ growth outlook remains stable as it plans to make acquisitions for overseas growth. But SIA Engineering will continue to face tough times in the near future as maintenance cycles are longer than before.

In view of these factors, the house maintains its Underweight rating on the aviation sector and warns that the headwinds it identified would be difficult to overcome.