CFA Society Singapore
SINGAPORE (Dec 21): DBS has a “neutral” rating on Singapore’s transport sector in 2019, with hopes that a better-than-expected economic growth and activity globally would help improve demand volume and pricing for the transport sector.
This in turn should help improve ROEs, which have been under pressure for the past few years.
The research house has ComfortDelGro and ST Engineering as its top “buy” picks. Meanwhile, for air travel growth proxies, DBS likes SATS and China Aviation Oil (CAO).
In a market focus report, lead analyst Paul Yong says, “We project ComfortDelGro’s earnings to register y-o-y growth from 4Q18 onwards, and going into FY19F.”
This is on the back of bottoming out in taxi fleet contraction in Singapore; earnings contribution from recent acquisitions; and public transport fare increase of 4.3% effective 29 December 2018.
This was evident in the group’s 3Q18 results, while still registering y-o-y declines in profits, the 2Q18 decline is of a smaller magnitude compared to the period from 1Q18 to 2Q18, thus indicating sequential improvement.
The research house likes ST Engineering for a number of factors, including strong inorganic growth potential from acquisition in the Aerospace segment; recovery in engine MRO demand and in the longer-term, sizeable contribution from Airbus P2F programmes currently in ramp-up phase; growing smart city revenues; remaining in the hunt for potential large contract awards in the US in the future, ranging from postal service trucks to army tanks; and good progress in the fields of logistics automation and systems integration for electric and autonomous vehicles.
On the other hand, SATS currently offers an attractive long term growth story, fuelled by passenger and air traffic growth at Changi Terminal 4; automation and staff productivity driving modest cost increases and better margins in the next few years; the opening of Terminal 5 by 2030; and more positive outlook from TFK Japan – with Japan aiming to grow the number of tourists to 40 million pax by 2020 and 60 million pax by 2040.
“We still like CAO given its monopolistic position as the sole importer of bonded jet fuel into China, and for its 33% stake in the exclusive jet fueller SPIA at Shanghai Pudong International Airport,” says Yong.
Although CAO’s share price has dropped by 22% YTD, its 9M18 earnings have increased by about 8%. And is now trading at an attractive FY18 price-to-earnings (PE) ratio of 8.4 times and FY19 PE of 7.6 times.
Due to higher oil prices and trade war concerns, DBS has kept Singapore Airlines (SIA) and Hutchison Port Holdings (HPH) Trust on “hold”, along with SIA Engineering, which is facing margin pressure.