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CGS-CIMB downgrades aviation sector, SIA Engineering gets sole 'add'

Jovi Ho
Jovi Ho10/18/2021 4:12 PM GMT+08  • 4 min read
CGS-CIMB downgrades aviation sector, SIA Engineering gets sole 'add'
“It stands to benefit from higher volumes of maintenance work when airlines increase their flying hours rapidly."
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Valuations are no longer attractive for aviation names, as investor optimism at early plans for restarting travel have lifted share prices, say CGS-CIMB Research analysts Raymond Yap and Lim Siew Khee.

In an Oct 15 note, Yap and Lim are downgrading the aviation sector to “neutral” from “overweight”.

“We prefer airport plays as they offer direct exposure to higher pax traffic, while airlines may face competitive yield pressures and higher oil price,” write Yap and Lim.

Yap and Lim upgraded their recommendations on Malaysia Airports Holdings (MAHB), Singapore Airlines (SIA) and SATS from “hold” to “add” in October 2020, November 2020 and February 2021 respectively.

“We are now downgrading our calls back to ‘hold’ after their strong share price performances, driven by market optimism over rising global Covid-19 vaccination rates and the positive outlook for domestic and international air travel restoration in the next three to six months,” write Yap and Lim.

Yap and Lim are downgrading AirAsia Group Berhad to “reduce” with a target price of RM0.23. “AirAsia Group’s (AAGB) market capitalisation implies a generous RM3.5 billion valuation for its digital businesses. Investors should not take for granted that AAGB will succeed against well-funded digital incumbents.”


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AAGB “remains a conundrum” for Yap and Lim, as its share price has doubled in the past 12 months, moving against their “reduce” call and low target price of 23 sen.

“We think that the market has implicitly valued AAGB’s digital businesses at RM3.5 billion, which is rich and assumes that AAGB can succeed against incumbent digital behemoths — an assumption that we are not yet prepared to make,” say Yap and Lim.

They are also downgrading MAHB and SIA to “hold”, with target prices RM7.40 and $5.76 respectively.

“Malaysia Airports Holdings’ (MAHB) domestic and international pax traffic will likely pick up strongly in the next three to six months, but valuations are within 10% of fully reflecting our recovery trajectory estimates,” write Yap and Lim.

“Singapore Airlines (SIA) will benefit from the Vaccinated Travel Lane (VTL) schemes and a likely broadening of Singapore’s moves to open its borders in the coming months. Valuations are now rich, and we see limited upside,” add Yap and Lim.

“Our target prices for MAHB, AAGB, SIA and SATS reflect what we believe to be an achievable recovery trajectory for pax traffic, considering that not all countries will lift Covid-19 entry/exit protocols immediately,” say Yap and Lim.

Yap and Lim forecast that international pax traffic for Malaysia and Singapore aviation players will recover to 40-50% of 2019’s pre-pandemic levels in 2022F, and to 70-80% in 2023F.

“These forecasts are based on our observations that major aviation markets in Northeast Asia, like China and Hong Kong, remain shut despite their high vaccination rates, while Malaysia and Singapore remain adverse to South Asian arrivals as they are perceived to be very high risk,” they add.

In Southeast Asia, vaccination rates in Vietnam, the Philippines and Indonesia remain below 50% of their respective populations, which may delay the full reopening of their aviation markets to sometime in 2022F.

SIA Engineering earns Yap and Lim’s sole “add” call in the sector, with a target price of $2.85.

“It stands to benefit from higher volumes of maintenance work when airlines increase their flying hours rapidly, and remains attractively priced at 1.5 standard deviations below its price-to-book value (P/BV) mean since 2011.”

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Among our “hold” calls, Yap and Lim prefer airport plays like MAHB and SATS over airlines like SIA, because the former group offers straightforward exposure to pax volume recovery, with airports’ cost structures largely fixed, whereas airlines’ earnings are complicated by other factors such as potential pax yield pressures as and when many airlines restore flights at the same time, which may also finally pop the cargo yield bubble when bellyhold capacity is back in force.

As at 3.45pm, shares in SIA are trading 1 cent lower, or 0.18% down, at $5.54; while shares in SIA Engineering are trading 1 cent higher, or 0.45% up, at $2.24; and shares in SATS are trading 2 cents higher, or 0.46% up, at $4.37.

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