Phillip 2018 Singapore Strategy: Transport Sector (Land & Aviation) December 19, 2017

This report is part of the Phillip 2018 Singapore Strategy Report.

  • Positive effect of scheduled public bus services restructured under the government contracting model
  • DTL losses to narrow in 2018, as Stage 3 commenced operations on 21 October 2017
  • ComfortDelGro’s partnership with Uber should mitigate some of the pressure faced by Taxi segment from PHVs
  • Rental cars population growth has moderated, and equilibrium with Taxi could be near

2017 Review

The sector’s financial performance was bolstered by the Public Transport Services segment, with SMRT Buses, a subsidiary of SMRT Corp (not listed) and SBS Transit being beneficiaries of the transition to the government-contracting model for scheduled public bus services. For illustration, SBS Transit’s Public Transport Services (combination of Bus and Rail) reported $17.16mn segment profit for 9M FY17, compared to $152,000 segment profit a year ago.

Average daily ridership for Downtown Line (DTL) was 258,000 in 3Q 2017, and the preliminary estimate for 4Q 2017 following the commencement of revenue service for Stage 3 (DTL3) is 420,000. LTA projects a steady-state average daily ridership of 500,000.

Taxi business model remains under threat by competition from ride-hailing apps. Comparison against total taxi population indicates that Comfort & CityCab has lost market share on a YoY and YTD basis. Rental cars population growth rate has peaked and stagnated from mid-2016 to mid-2017, and has since moderated downwards, refer Figure 72.

 

Figure 72: Rental cars taking share from taxis

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Outlook

SBS Transit’s Public Transport Services segment to see YoY growth in 2018, with full-year revenue recognition from DTL3 (higher ridership and narrowing of DTL losses) and take-over of the Seletar bus package in 1Q 2018. These positives are offset by an equivalent 2.2% fare reduction effective 27 December 2017 and higher maintenance expense for North East Line. (Fare reduction only affects Rail segment; Bus segment is unaffected.)

ComfortDelGro announced that it would be partnering Uber by taking a 51% stake in Lion City Rentals. This should be a net positive, with access to the private hire vehicle (PHV) business model through vehicle rental, and the contribution to its Engineering Maintenance segment. ComfortDelGro will be making further announcements when more details of the partnership are finalised.

With the moderating of Rental cars population growth, we would be looking to see if the population starts to stabilise, and equilibrium between Taxis and Rental cars is achieved.

Recommendation

We have a BUY call on ComfortDelGro. We see earnings for ComfortDelGro bottoming in FY17, primarily driven by the Public Transport Services segment.

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  • Passenger yields across SIA parent airline, SilkAir and Scoot remain under pressure; bright spot from cargo yield as freight volumes increase
  • SATS expanding inorganically through partnerships
  • Margins continue to compress for SIA Engineering

2017 Review

SIA Ltd reported 32% YoY higher PATMI for 1HFY18, but management commented that passenger yield (which is a measure of passenger fares) remains under pressure. In terms of costs, the average price of jet fuel for 9M 2017 rose 23% YoY, albeit still far lower than the historical highs that were in excess of US$100/bbl. Fuel cost remains as SIA Group’s largest cost component (~25% of 1H FY18 revenue). Interim dividend of 10 cents declared, higher than previous year’s 9 cents.

SATS Ltd also highlighted the competitive pressures in the sector stemming from passenger yield. This results in airlines being selective in their menus, and the inability for SATS to raise prices. Nonetheless, 1H FY18 underlying net profit for SATS Ltd grew 4.2% YoY, which was driven by 41.4% YoY higher contribution from associates/JVs. Interim dividend of 6 cents declared, unchanged from previous year.

Operating margin for SIA Engineering Company compressed, on higher staff costs and subcontract costs. Group operating profit has contracted to the extent that associates/JVs contributed more than half of earnings in 2Q FY18. Interim dividend of 4 cents declared, unchanged from previous year.

Outlook

The key cost factor for airlines is fuel price. SIA has benefited from the lower jet fuel price, and management expects it to remain volatile. Apart from pressure on passenger yield, fuel price also has a direct impact on profitability. SIA Group will be taking delivery of modern and fuel-efficient aircraft. This should be a mitigating factor on fuel costs, but with the offsetting effect of higher depreciation charge.

SIAEC management guided for a challenging outlook, as new-generation aircraft and engines require less frequent maintenance and lighter work content. Cash flow remains positive and balance sheet is in a net cash position, but the lack of a major catalyst would keep the share price muted.

Unlike SIA and SIAEC, SATS is not entirely dependent on the aviation sector, due to its 87:13 revenue mix between aviation and non-aviation. SATS has been making investments in new ventures, which should contribute positively after their respective gestation periods.

Domestically, two projects are in place to expand passenger capacity at Changi Airport. The opening of Terminal 4 expanded Changi Airport’s passenger handling capacity by 16mn to 82mn and subsequently Project Jewel (4Q 2018), which is expected to bring an additional 3mn capacity by connecting Terminals 1, 2 and 3 together.

Recommendation

Out top pick is SATS. We see credible earnings growth as SATS continues to make investments in new associates/JVs. SATS also recently entered into a Ground Handling and Food Solutions JV with AirAsia and Turkish Airlines, respectively. We view this positively. It gives SATS exposure to markets far larger than the domestic volumes at Changi Airport. There is scope for our estimates for SATS to be revised upwards, as clarity emerges when the various JVs begin contributing.

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Richard Leow
Investment Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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