Fri, 23 Dec 2011, 17:31:07 SGT
The uncertain economic outlook ahead continues to weigh down on business confidence, which in turn negatively impacts global travel and trade volume. Weak demand outlook and high current fuel prices raise concerns on both the aviation and shipping sub-sectors and we are UNDERWEIGHT on both these sectors. While the weakness seen in the aviation sector may filter down, we are NEUTRAL on the aviation service providers. The outlook on these service providers is still healthy because air traffic and global aircraft fleet should continue to grow over the longer term. We are OVERWEIGHT the land transportation sub-sector in Singapore because it has no viable large-scale substitute. We prefer ST Engineering [BUY, FV: S$3.01], due to its diversified revenue streams, and SMRT Corp [BUY, FV: S$2.04] for the defensive nature of its business.
Weak leading aviation indicators and high fuel prices. Business confidence and global air freight volumes, which usually fall ahead of air travel traffic during downturns, have been declining in recent months. Both these indicators point to weakening demand in air travel. Together with high jet fuel prices, which have averaged 29% higher than in CY10, there is a prevalent pessimism surrounding the aviation sub-sector. Thus, we rate the aviation sub-sector UNDERWEIGHT.
Aviation service providers’ outlook is also gloomy, but longer term prospects are intact. The air of pessimism that currently surrounds the aviation industry may, in the near term, cascade down to the maintenance, repair and overhaul (MRO) service providers and ground handlers. However, the longer term prospects for MRO players and ground handlers are still positive. With global air travel traffic projected to continue growing in the long term and the global passenger aircraft fleet forecasted to double by 2030, we remain NEUTRAL on this sub-sector.
Excess capacity in shipping exacerbated by poor demand. Global trade volumes in 2011 failed to grow in line with earlier expectations. With the global fleet of container ships growing 17% over the past four years, the unfavourable demand-supply dynamics have hit freight rates – the Shanghai Containerised Freight Index is down 24% YTD. Looking forward, excess capacity is unlikely to ease while global trade is likely to remain subdued in 2012. Therefore, we rate the shipping sub-sector UNDERWEIGHT but maintain our preference on Goodpack [BUY, FV: S$1.70] due to its specialty and dominance in the shipping of rubber.
Singapore’s land transport has no viable substitute. The land transportation sub-sector in Singapore has no viable large-scale substitute. Ridership levels are unlikely to dip regardless of economic cycles, as long as the infrastructure maintains its relevance and the cost of private car ownership remain out-of-reach for a majority of the populace. With new train lines to be gradually added to Singapore’s subway network over the next few years, we remain OVERWEIGHT on the land transport sub-sector.
Likely bumpy ride ahead – seek defensives. The uncertain economic outlook ahead continues to weigh down on business confidence, which in turn negatively impacts global travel and trade volume. With high fuel prices also causing some concerns, we UNDERWEIGHT the transport sector going into a likely difficult 2012. Within the sector, we prefer ST Engineering [BUY, FV: S$3.01], due to its diversified revenue streams, and SMRT Corp [BUY, FV: S$2.04] for the defensive nature of its business.