Sector Overview

The Transportation Sector under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT (SELL; TP: $1.35), ComfortDelGro (BUY; TP: $1.80)) & Aviation Services (SIA Engineering, ST Engineering, SATS).

• Upgraded SATS (TP: $2.94) & NOL (TP: $1.36) to Accumulate
• SATS could increase core dividends
• SIA EC (BUY; TP: $5.00) to benefit from new orders by the SIA group
• Potential defence contract win for ST Engineering (BUY; TP: $3.96) a catalyst
• Sector neutral pair-trade: long SIA (BUY; TP: $13.40), short Tiger Air (SELL; TP: $0.45)

Upgrade SATS & NOL to Accumulate

We upgraded SATS to Accumulate on better than expected earnings and opine that the current level of profitability could be maintained. The company could also increase its core dividends in the future as they gear up to an optimal capital structure. We also upgraded NOL to Accumulate, primarily due to improved competitiveness with the delivery of new vessels and streamlining efforts at the company. The planned divestment of NOL building would also release cash at a time when CAPEX needs are high for the company. Furthermore, we believe that the competitive landscape and resolute to return to profit is likely to prevent a collapse of freight rates to levels observed in 2011.

Sector Neutral Pair-Trade: Long SIA, Short TGR

We find the relative valuation between SIA and Tiger Airways as an anomaly. Following the price realization event for its Australia operations, we computed the core valuations for Tiger Airways by stripping out its Australia business. We find that Tiger Airways (ex-Australia) currently trades at a significant premium to the stock of SIA. While better growth prospects for short haul, intra-Asia routes implies that Tiger Airways should trade at a premium to SIA, we find the premium implied by market prices as too high. Hence, we suggest a sector neutral pair trade: long SIA and short TGR to profit from what we view as a mispricing in the market.

PhillipCapital Research - 19 Nov 2012