• Weak showing from 1QCY15 results
• No indications of near-term recovery
• Maintain UNDERWEIGHT

Review of 1QCY15 results

The airlines’ results came in mostly disappointing: 1) Singapore Airlines’ (SIA) [HOLD; FV: S$11.59] FY15 results were below expectations, as PATMI fell 16% to S$333.4m on weaker contributions from JVs and associates, as well as large hedging losses, and 2) Tiger Airways (Tigerair) [SELL; FV: S$0.30] saw a year of restructuring in FY15 as it continued to downsize operations but overcapacity and weak yields still led to core net loss of S$72.5m.

The performances from aviation service providers were more mixed: 1) ST Engineering’s (STE) [HOLD; FV: S$3.33] 1Q15 results came in within expectations as core earnings slipped 2.2% YoY to S$142.9m as revenue from most segments saw decline, 2) SIA Engineering Company’s (SIAEC) [SELL; FV: S$3.45] FY15 results slightly missed our expectations as PATMI plunged 31.0% to S$183.3m on fewer aircraft/engines workshop visits, but 3) SATS Ltd’s (SATS) [HOLD; FV: S$3.11] FY15 results were above our expectations as PATMI grew 7.0% to S$195.9m on disciplined cost management and better business mix. Lastly, for shipping, Neptune Orient Lines’ (NOL) [HOLD; FV: S$1.15] 1Q15 results improved as net loss from continuing business dropped 71% to US$36m on cost savings driven by tight cost control and better operational efficiency but weak freight rates persisted.

Maintain UNDERWEIGHT on Aviation Sector

In our view, the airline industry continues to be plagued by overcapacity in the region as capacity is expected to increase over the next two years. Also, outlook for air travel demand is unlikely to be rosy after IMF in Apr-15 maintained its world economic growth forecasts for CY15 and CY16 at 3.5% and 3.8%, respectively. Furthermore, Thailand’s aviation sector came under fire after serious safety issues surfaced from the audit conducted by UN’s International Civil Aviation Organisation (ICAO). Consequently, it is logical to deduce that the service providers are likely to see tough times ahead too. On these reasons, we maintain UNDERWEIGHT on the Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector

Even though port congestion in the U.S. West Coast (USWC) is easing after tentative labour agreement had been reached, we think overcapacity issue is unlikely to ease in the near-term with more vessel deliveries expected this year. While the Transpacific Stabilisation Agreement (TSA) has recommended minimum contract rates on transpacific routes, we think any recovery is too early to tell, especially when IMF cut its world trade volume forecasts for CY15 and CY16 by 0.1% and 0.6% to 3.7% and 4.7%, respectively. Hence, we maintain UNDERWEIGHT on the Shipping Sector.

Source: OCBC Research - 26 May 2015