• 2014 had seen weak performances
• 2015 remains challenging
• Maintain UNDERWEIGHT

2014 has been a poor year

In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries.

Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, mainly dragged down by lower yields, loss making subsidiaries, SIA Cargo (SIAC) and Scoot, as well as from its associate, Tiger Airways Singapore (Tigerair).

For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses.

The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80] and SATS Ltd [HOLD; FV: S$2.92] (SATS), also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, the weakening Japanese Yen and increasing labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks.

In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates. This impacted NOL’s profitability, which remained depressed as its 9M14 bottom-line turned into net losses of US$175m from 9M13’s net profit of US$61m.

Maintain UNDERWEIGHT on Aviation Sector

We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015.

Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, we think the cost savings will be limited by the lower fuel surcharges as well. Hence, on these grounds, we maintain our UNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector

Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships.

As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHT on the Shipping Sector.

Source: OCBC Research - 5 Dec 2014