Broker's take: CGS-CIMB downgrades Asean aviation sector to 'neutral' as valuations level out

CGS-CIMB has downgraded the Asean aviation sector from "overweight" to "neutral" as valuations level out after investor optimism over economic reopening helped lift share prices.

In a report last Friday (Oct 15), analyst Raymond Yap noted that with global Covid-19 vaccination rates rising as well as domestic and international travel gaining a positive outlook as air travel begins to return, the Asean aviation sector has seen strong share price performance.

However, as not all countries are looking to lift Covid-19 entry and exit restrictions immediately, international passenger traffic is unlikely to recover to pre-pandemic levels quickly. Yap forecasts Singapore's international passenger traffic to recover to about 40 per cent to 50 per cent of 2019 pre-pandemic levels in 2022, and to 70 per cent to 80 per cent in 2023.

Asia as a whole is behind the US and Europe in lifting travel restrictions, reducing the upsides for aviation counters, the brokerage noted.

Airport cost structures are largely fixed, while airlines' earnings are complicated by factors such as potential passenger yield pressures as carriers mount flights at the same time, making recovery non-linear for these counters. Furthermore, the cargo yield bubble "might just pop" as more flights become available to haul cargo in their bellies, according to CGS-CIMB.

As such, Yap has downgraded SATS S58 to "hold" with a target price of S$4.66. As at the midday break on Monday, SATS shares were up S$0.02 or 0.5 per cent at S$4.37.

Singapore Airlines C6L is in a stronger position with its balance sheet and low exposure to spot oil prices. Yap estimates that SIA has fuel hedges to cover 70 per cent to 80 per cent of its fuel requirements for 2022. SIA's liquidity will also help it navigate the medium term as business and premium travel may take longer to recover to pre-pandemic levels. Its transit business model may also be affected amid multi-jurisdictional travel requirements.

Therefore, Yap has downgraded SIA to "hold". He has a target price of S$5.76 for the airline. SIA shares were trading at S$5.54, down S$0.01 or 0.2 per cent, as at the midday break on Monday.

There is a potential silver lining in the industry, however, as engineering plays are set to look more attractive, with aviation maintenance work ramping up in tandem with increased flying hours. Yap is maintaining "add" on SIA Engineering S59 with a target price of S$2.85. As at the midday break on Monday, shares of SIA Engineering were trading at S$2.24, up S$0.01 or 0.5 per cent.

Read more:

• Aviation, tourism-linked counters soar amid VTL announcements
• SIA reports moderate uptick in Sept passenger traffic on Vaccinated Travel Lane tailwind
• Sats shows path to diversification for travel-related companies
• SIA Engineering signs new maintenance agreement with Hawaiian Airlines