Valuations no longer attractive

  • We downgrade the Aviation sector from OW to N, with MAHB, SIA and SATS downgraded from Add to Hold; AAGB remains a Reduce; SIE remains Add.
  • Investor optimism at the nascent resumption of domestic and international air travel has lifted share prices to levels we no longer consider attractive.
  • We prefer airport plays as they offer direct exposure to higher pax traffic, while airlines may face competitive yield pressures and higher oil prices.

Closing our Add recommendations on MAHB, SIA and SATS

We upgraded our recommendations on MAHB, SIA and SATS from Hold to Add in Oct 2020, Nov 2020 and Feb 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 3-6 months. 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. We
broadly 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. 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. Asia, as a whole, remains far behind the US and Europe in the lifting of travel restrictions. Based on this reality, upsides to our target prices for MAHB, SIA and SATS (which we have lifted in this report) are now less than 10%, placing them in the ‘Hold’ range of our recommendation framework.

Prefer airport and engineering plays; airlines more risky

Our only Add call is SIA Engineering (SIE, TP: S$2.85), as it stands to benefit from higher volumes of maintenance work when airlines increase their flying hours rapidly, and remains attractively priced at 1.5 s.d. below its P/BV mean since 2011. Among our Hold calls, we 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. Among airlines, we prefer SIA for its much stronger balance sheet than AAGB (Reduce) and its low exposure to spot oil prices. We estimate SIA has outstanding fuel hedges that will cover 70-80% of its fuel requirements for CY22F, whereas AAGB is completely exposed. SIA’s substantial liquidity will likely help it navigate the medium term, during which business and premium travel may take longer than leisure and economy-class travel to recover back to their pre-pandemic levels, and the recovery of its transit business model may be slowed by complicated multi-jurisdictional regulations.

Have we missed something about AAGB?

AAGB remains a conundrum for us, as its share price has doubled in the past 12 months, moving against our Reduce call and low target price of 23 sen. AAGB is currently trading at more than 5x our CY21F RNAV of 23 sen, while in 2019, AAGB traded at an average P/BV multiple of only 1.15x. We think that the market has implicitly valued AAGB’s digital businesses at RM3.5bn, which is rich and assumes that AAGB can succeed against incumbent digital behemoths — an assumption that we are not yet prepared to make.

Sector upside and downside risks

Upside risk: Faster-than-expected border reopenings among Asia-Pacific nations. Downside risks: high oil prices, and possible yield compression due to heavy competition (for airlines); semi-permanent cuts in airlines’ capacity and networks (for airport plays).