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Hot stocks: Falling yields of airlines weigh on SIA, SATS

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THE share prices of Singapore Airlines (SIA) and SATS came under pressure on Monday amid nagging concerns over falling yields of airlines.

SIA shares, which plunged the most in nearly six years last week after reporting a shocking loss because of intense rivalry, remained weak. At 2.25pm, they were trading at S$9.79 a share, down 19 Singapore cents, or almost 2 per cent.

SATS, the chief ground-handling and in-flight catering service provider at Singapore Changi Airport, was trading at S$5.06, down 23 Singapore cents, or 4.35 per cent.

Early Friday morning, SATS had reported a net profit of S$66.6 million for the fourth quarter ended March 31, 2017, compared to a net profit of S$50.7 million a year ago. For the full fiscal year, it made a net profit of S$257.9 million versus S$220.6 million in fiscal 2016. Its shares traded up almost one per cent to close at S$5.29 on Friday. However, sentiment changed by Monday.

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Analysts, including OCBC's Eugene Chua, noted that SATS management had warned that a few factors might potentially result in lower margins over the near-term for the company. These included falling yields of airlines translating to pricing pressure for SATS, lower government subsidy of staff costs, and the cessation of franchise fee rebates with effect from April 1, 20 17.

However, Mr Chua was keeping his hold call on SATS, and would look to re-engage closer to S$4.70 a share. He has raised his fair value for the stock to S$5.12 each, from S$4.70 previously.

"Over the longer term, we continue to expect SATS' strategy of diversifying out of Singapore through partnerships and/or M&A activities to drive positive growth,'' Mr Chua said.

As for national carrier SIA, Mr Chua believed the worst may not be over, adding: "Continue to expect yield erosion to persist on overcapacity and sustained low oil price environment."

"Coupled with heavy capital expenditure spending ahead alongside higher staff costs to handle expanded fleet, the outlook of SIA will likely remain weak,'' said Mr Chua, who has a hold on SIA.

DBS analyst Paul Yong also kept his hold on SIA as he remained "cautious on the near-term earnings outlook for SIA as its flagship passenger business continues to face stiff competition and soft yields, leading to lower profitability".

"With operating margins razor thin, SIA is vulnerable to any demand shock and/or an increase in fuel prices,'' noted Mr Yong, who has a target price of S$10.10 a share for SIA.