Benjamin Cher

 

SINGAPORE (16 Sept): SIA&rsquo s surprise decline in passenger traffic is leading UOB Kay Hian to cut profit forecasts by 22% while issuing a &ldquo maintain market weight&rdquo call on the aviation sector.

This weak performance has implications for SATS and SIA Engineering&rsquo s earnings if traffic through Changi airport is weakened, says UOB Kay Hian in Friday report led by lead analyst K Ajith. The analyst is recommending a &ldquo sell&rdquo call on SIA Engineering while suggesting investor top-slice holdings on SATS.

Ajith notes that the surprise decline in passenger traffic and carriage &ndash 6.8% and 5.5% respectively &ndash is SIA&rsquo s weakest August growth numbers in four years, with regional carrier SilkAir also posting a 2% on-year decline. While he rules out the Zika outbreak as a factor for the decline, there is uncertainty if the weak demand is due to competitive factors or general slowdown in traffic.

Load factors for SIA suffered the steepest decline in more than three year of 5.6%, despite flat capacity growth, with Europe showing the greatest decline of 8%. SIA has attributed this decline to softer demand in a competitive landscape, with year to date passenger load factors lower at 78% compared to a forecasted 79.2%.

The factors of increased competition, falling demand and capacity additions by Chinese carriers to Australia seems to suggest a potential turning point for SIA, Ajith notes. Forecasts for SIA&rsquo s profit for FY17 are now expected to hit $485 million, 42% lower than the general estimate of $831 million.

  SIA&rsquo s decline has implications for both SATS and SIA Engineering as well, Ajith notes. SIA&rsquo s weaker passenger throughput could lead to lower unit meals for SATS.

&ldquo If Changi Airport growth numbers slow down as expected, we believe there will be a downside risk to our and consensus earnings estimates,&rdquo says Ajith. UOB Kay Hian is recommending investors to top-slice holdings on SATS and buy between $4.10 and $4.20.

SIA Engineering could also be negatively impacted, as it derives 66% of its revenue from SIA, with line maintenance holding the highest margins.

&ldquo If SIA cuts capacity in response to weaker loads, this could impact SIAEC&rsquo s line maintenance revenue,&rdquo says Ajith.

For SIA, UOB Kay Hian has lowered the target price to $10 from $10.20 with the suggested entry price of $9.00.

Shares of SIA closed at $10.49, shares of SIA Engineering closed at $3.80 and SATS closed at $4.88.