Transportation Sector

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1 Aviation Statistical Update Report type: Update Sector Overview The under our coverage consists of Airlines (SIA, Tiger Airways), Shipping (NOL), Land Transport (SMRT, ComfortDelGro) & Aviation Services (SIA Engineering, ST Engineering, SATS). A positive shift in sentiments of Airline Executives Passenger & flight throughput increased at key airports Cargo market remains sluggish Profits of airlines could receive a boost from the correction in oil prices A positive shift in sentiments of Airline Executives Recent IATA surveys indicated a positive shift in sentiments among airline executives. While cargo yields are expected to weaken, passenger yields are expected to improve over the next 12 months. Along with expectations of improved passenger volume and lower oil prices, profitability expectations for the next 12 months have improved to the highest level since Jan Passenger & flight throughput increased at key airports Passenger & flight traffic at key airports to the companies under our coverage have shown improvement over the last quarter. Traffic at Changi Airport & Hong Kong International Airport continued to expand at approximately 5-12%. Passenger throughput increased by >25% at Narita Airport, benefitting from the low base effects of the Great Japan Earthquake in Mar Positive growth momentum at the airports bode well for SIAEC & SATS. Phillip Securities Research Pte Ltd Company Rating Price TP Upside M.Cap. (S$) (S$) (%) (US$'mn) Land Transport SMRT Corp Sell % 1,977 ComfortDelGro Buy ,739 Airlines Singapore Airlines Accumulate % 9,936 Tiger Airw ays Reduce % 459 Shipping Neptune Orient Lines Neutral % 2,327 Transport Services SATS Buy % 2,454 ST Engineering Accumulate % 8,012 SIA Engineering Buy % 3,685 Source: Bloomberg, PSR Analyst Derrick Heng derrickhengch@phillip.com.sg Cargo market remains sluggish Cargo demand for SIA Cargo continued to contract in line with broad based weakness across global air freight markets. Weak economic sentiments continued to impact trade flows with little respite in the near term. Profits of airlines could receive a boost from the correction in oil prices While our preference in the sector continues to be high yielding Aviation Services stocks, we also see the current price as an attractive entry point for SIA. Robust performance on key premium markets, expectations of improvement in passenger yields by industry executives and strong load factors in SIA s cabins seems to suggest that the company may not need to offer promotional fares for much longer and passenger yields could improve by 2HFY13! The light hedging profile of SIA implies that its profits would receive a boost from the recent correction in oil prices of c. from its peak. Hence, while we keep our estimates unchanged for now, we see an upwards bias to our full year estimates for SIA. MICA (P) 012/01/2012 Ref. No.: SG2012_ of 9

2 AIRLINES IATA. Latest statistics from IATA highlighted that growth in global premium traffic volumes slowed to 1.7% in May 2012, with the largest contributors to the slowdown from the North Atlantic and Intra-Europe markets. We believe that performance in premium markets for Europe-Far East and within Far East has the most significance for SIA. Performance on these two key segments was encouraging and has continued to outperform the overall premium market. According to a July survey conducted by IATA, profitability expectations for the next 12 months have improved to the highest level since Jan Key sources of the improvement in expectations were due to 1) large fall in input prices, 2) expectations of modest improvement in passenger yields and 3) expectations of improved passenger volumes. Cargo volumes are expected to improve with cargo yields expected to decline. SIA. SIA reported very strong passenger load factors of 79.5% for the quarter. Despite reduction in capacity by SIA Cargo, freight load factors fell due to an even larger fall in traffic. SilkAir remains the bright spot in the Group with a solid operating performance. Management commentaries continued to emphasize promotional activities, which could have stimulated demand, resulting in the strong passenger load factors in the quarter. We attempt to draw some conclusions on SIA s future performance by comparing recent data points. Robust performance on key premium markets, expectations of improvement in passenger yields by industry executives and strong load factors in SIA s cabins seems to suggest that the company may not need to offer promotional fares for much longer and passenger yields could improve by 2HFY13! However, strong capacity injection into the region and structural shift in demand to budget travel could be a risk to our view of improvements to future yields. The light hedging profile of SIA implies that its profits would receive a boost from the recent correction in oil prices of c. from its peak. Hence, while we keep our estimates unchanged for now, we see an upwards bias to our full year estimates for SIA. Tiger Airways. Tiger Airways recently commenced operations in Sydney and is expected to be operating at pregrounding levels by Oct While fleet utilization should improve from flights launched out of its second base, we do not expect its operations in Australia to be profitable in the near term as yields remain under pressure as seen from Air Fare data disclosed by BITRE. Fig 1. Global Premium Traffic Dec-06 Premium Traffic Vol, y-y (%) Fig 2. Europe Far East Premium Traffic Dec-06 Europe - Far East Premium Traffic Vol, y-y (%) Fig 3. Within Far East Premium Traffic Dec-06 Within Far East Premium Traffic Vol, y-y (%) Source: IATA, PSR Apr 12: +5.8% May 12: +1.7% Source: IATA, PSR Apr 12: +11. May 12: +2.4% Source: IATA, PSR Apr 12: +17.9% May 12: +11.2% Fig 4. Airline Profitability Expectations Improved Source: IATA 2 of 9

3 Fig 5. Passenger yields expected to improve AVIATION SERVICES SATS. SATS reported a strong set of operating statistics in the quarter that is marginally above our expectations. Passengers handled out of Changi Airport crossed the 10mn mark for the first time in history. Strong Unit Meal production of 7.9%y-y implies that Full Service Carrier growth remains robust at the airport. Source: IATA Fig 6. Cargo yields expected to weaken Source: IATA Fig 7. Australia Domestic Budget Air Fares remains under pressure Best Discount 13mma y-y (%) Source: BITRE, PSR Mar-13 Sep-12 Mar-12 Sep-11 Mar-11 Sep-10 Mar-10 Sep-09 Mar-09 Sep-08 Mar-08 Sep-07 Mar-07 Fig 8. Oil price corrected by from recent peak Dec-06 Source: Bloomberg, PSR WTI Brent At Hong Kong International Airport, Passenger & Flight traffic increased by 6.5% and 4.9% respectively. With a market share of 17% for passenger handling and 24% of the ramp handling market at the airport, SATS HK is likely to have benefitted from the growth. Cargo volumes remained sluggish as weak economic sentiments continued to impact trade flows. While still in contraction, volumes handled by SATS s 49% Associate, Asia Airfreight Terminal (AAT) seems to have bottomed out at the start of Japan Airlines (JAL) reported that the company s International Passenger traffic increased by more than 3y-y for April & May However, the strong growth figures were exaggerated by the low base effects from the Earthquake in Mar Sequentially, the statistic was relatively stable. We expect SATS s Inflight catering arm in Japan, TFK Corp, to breakeven on revenue of S$76mn. SIAEC. The near double digit growth rate of flight traffic at Changi Airport indicates that flights handled by SIAEC, a Line Maintenance leader, probably increased in the quarter. Further capacity injection by airlines implies that the outlook for MRO demand remains positive. ST Engineering. STE announced S$2.5bn worth of contracts YTD, which would likely take its order book to a new high. In June, STE announced the acquisition of certain assets of Pemco that would increase its Heavy Maintenance capacity by 16%. Fig 9. Airport Passenger Throughput, 3mma y-y (%) Jan-05 Source: CEIC, PSR Jul-05 Changi Airport Hong Kong IA Japan: Narita Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 3 of 9

4 Fig 10. Airport Flight Throughput, 3mma y-y (%) 15% 5% -5% - -15% Source: CEIC, PSR Changi Airport Hong Kong IA Japan: Narita Fig 12. SATS Operating Statistics 1QFY12 4QFY12 1QFY13 y-y (%) q-q (%) SATS Op. Statistics Unit Services Handled ('k) % 6.7% Flights Handled ('k) % 1.5% Cargo/Mail ('k tonnes) % 2.1% Passengers Handled ('M) % 3.6% Unit Meals Produced ('M) % 3. Gross Meals Produced ('M) % Source: SATS, PSR Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Fig 11. Airport Cargo Throughput, 3mma y-y (%) Jan-05 Source: CEIC, PSR Jul-05 Changi Airport HACTL AAT Japan: Narita Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jul-08 Jan-09 Jan-09 Jul-09 Jul-09 Jan-10 Jan-10 Jul-10 Jul-10 Jan-11 Jan-11 Jul-11 Jul-11 Jan-12 Jan-12 Jul-12 Jul-12 Fig 13. SIA Operating Statistics 1QFY12 4QFY12 1QFY13 y-y (%) q-q (%) Singapore Airlines ASK ('mn seat-km) 27, , , % 1.4% RPK ('mn p-km) 21, , , % 3.9% Pax carried ('000) 4,147 4,342 4, % 3.6% Pax load factor (%) 75.6% 77.6% 79.5% 3.8% 1.9% SIA Cargo CTK ('mn tonne-km) 2, , , % 1.5% FTK ('mn tonne-km) 1, , , % 3. Freight carried ('mn kg) % 1.2% Cargo load factor (%) 64.7% 61.9% 62.8% -1.9% 0.9% SilkAir ASK ('mn seat-km) 1, , , % 8.3% RPK ('mn p-km) 1, , , % 9.9% Passengers carried ('000) % 5.9% Passenger load factor (%) 76.3% 75.3% 76.4% 0.1% 1.1% Overall Capacity ('mn tonne-km) 5, , , % 1.6% Load carried ('mn tonne-km) 3, , , % 3.4% Overall load factor (%) % 68.4% 0.6% 1.8% Source: SIA, PSR Fig 14. Tiger Airways Operating Statistics 12M to 12M to y-y (%) Group ASK ('mn seat-km) 10,191 10, % RPK ('mn p-km) 8,736 8, % Pax carried ('000) 6,241 5, % Pax load factor (%) 85.7% 80.6% -5.9% Tiger Airw ays Singapore ASK ('mn seat-km) 6,020 8, % RPK ('mn p-km) 5,159 6, % Pax carried ('000) 3,081 3, % Pax load factor (%) 85.7% 80.9% -5.6% Tiger Airw ays Australia ASK ('mn seat-km) 4,172 1, % RPK ('mn p-km) 3,577 1, % Pax carried ('000) 3,160 1, Pax load factor (%) 85.7% 79.7% -7.1% Source: Tiger Airw ays, PSR 4 of 9

5 Valuation Comparables Company Rating FYE Price TP Upside Market Ent. Equity Multiple (X) Dividend Yield (%) Market price as of: Cap. Value Net Income Book Value 18-Jul-12 (%) (US$'mn)(US$'mn) FY10/11 FY11/12EFY12/13E FY10/11 FY11/12EFY12/13E FY10/11 FY11/12EFY12/13E Land Transport SMRT Corp Sell Mar % 1,977 1, % 4.5% 4.5% ComfortDelGro Buy Dec ,739 3, % 3.6% 3.3% Airlines Singapore Airlines Accumulate Mar % 9,936 6, % 1.9% 2.8% Tiger Airw ays Reduce Mar % (5.8) Shipping Neptune Orient Lines Neutral Dec % 2,327 4, (4.9) (13.7) % Transport Services SATS Buy Mar % 2,454 2, % 9.3% 5.2% ST Engineering Accumulate Dec % 8,012 7, % 4.7% 4.8% SIA Engineering Buy Mar % 3,685 3, % Source: PSR est. *FY10/11 refers to: FY10 for FYE Dec & FY11 for FYE Mar 5 of 9

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