We all know that the coronavirus will not
spread on forever. Eventually, it will be contained, we just do not know when.
The sectors badly affected, including airlines, will gradually recover.
Nevertheless, this episode illustrates the
volatile nature of the airline industry. For investors who are more risk-averse,
yet want to participate in the long-term growth of Asia Pacific aviation
sector, are there other available investment options?
In this article, we take a look at 4 other
sectors closely linked to the aviation industry that stand to benefit when
people start travelling again.
Repair and Overhaul
companies provide maintenance, engine overhaul, airframe and fleet management
and cabin modification services to airlines, private jets and military. Think
of this as the car repair workshop equivalent, but with a way larger scale and
deeper technical sophistication.
There are two major MRO companies listed in Singapore: SIA Engineering Company (SGX: S59) (SIAEC) and Singapore Technologies Engineering Ltd (SGX: S63) (STE).
SIAEC, as a subsidiary of SIA, counts SIA, Silkair and Scoot as its key customers. Besides, it also provides MRO services to more than 50 airlines passing through Singapore. It also forms 24 joint ventures with partners such as Boeing, Airbus, Pratt & Whitney and Rolls-Royce to deepen its service offering worldwide.
to SIAEC, STE is a larger and more diversified company. As the largest
commercial airframe MRO player in the world, it counts national armed forces on
top of the commercial players as its key clients. It also possesses the ability
to provide a full suite of cabin reconfiguration and freighter conversion
solutions to both Airbus and Boeing platforms.
For the 9
months 2019 financials, SIAEC generated revenue of $764.8 million and operating
profit of $53.4 million. As for STE, its revenue stood at $5.58 billion, with a
profit before tax of $496.5 million.
companies are well-known income stocks among investors. In 2018, SIAEC paid a
dividend of 11 cents per share, giving it a 4.4% yield based on $2.46 share
price. STE’s yield would hence be 3.5% based on a share price of $4.29.
aircraft often costs billions of internal funds, retained earnings and borrowed
capital. Such capital expenditure is costly, yet necessary every few years.
While top airlines like SIA or Emirates have the financial muscle to place
large aircraft orders, other airlines that do not have the ability to buy
planes will instead rent their fleet from aircraft leasing companies.
could be other reasons to rent instead of buying. It could be due to management
preference to maintain an asset-light company to reduce depreciation cost. It
may also be intentional moves to adjust capacity in response to market
situations. Some companies use this method to minimise large upfront capital
cost in the cyclical airline sector.
There is actually
a prominent aircraft leasing company headquartered in Singapore: BOC
Aviation Ltd (HKG: 2588). It was founded in 1993 as a joint venture between
SIA and a leasing firm from the US. Bank of China acquired the company and
renamed it BOC Aviation in 2006. In 2016, BOC Aviation listed its shares at the
Hong Kong Exchange in what was the largest aircraft lessor offering in history.
As of 30 June
2019, BOCA has a total portfolio of 499 aircraft out of which 314 are owned,
with an average age of 3.1 years and remaining lease term of 8.2 years.
As shown below,
BOCA showed steady growth in its revenue, from US$535 million to US$930 million
in 1H19. The main bulk of revenue comes from lease rental income, which has
been increasing regularly too. As a result, its net profit after tax has risen
to US$321 million in 1H19.
Source: BOCA 2019 Interim Report
trading under stock code 2588 on Hong Kong exchange, at a share price of
HK$70.75 per share, giving it a market capitalisation of around HK$49.1
sector covers the provision of various ancillary services such as passenger
services, baggage handling, warehousing, aviation security and in-flight
catering to ensure the smooth operations of airlines and airports. This is a
more labour-intensive sector compared to the MRO field.
company in this sector is SATS Ltd (SGX: S58). It is the dominant gateway service provider at Changi
Airport. Concurrently, it has the largest food and gateway services network
across Asia, being present in 13 countries across 60 locations.
Source: SATS 3Q FY20 Earnings Presentation
a challenging financial year thus far. For the 9 months FY20, SATS recorded revenue
growth of 11.2% to $1.50 billion. However, due to increase expenditure, its
earnings before interest and tax dropped by 5.9% to $184.7 million. Following
that, the margin gets compressed to 12.2%
especially the major ones located at gateway cities, are strategic assets of
national interest. They are usually owned and operated by the state. However,
it is not uncommon to find listed airport companies too.
company is the Beijing
Capital International Airport Co Ltd (HKG: 0694) that is listed on the Hong Kong
Exchange under stock code 0694. As the owner and operator of Beijing Capital
Airport, its revenue stream comes from aeronautical and non-aeronautical
segments. The former includes passenger charges, airport movement fees,
aircraft parking fees, while the latter includes concessions of retail outlets,
leasing of advertising space and carpark charges.
As of 6
months ended June 2019, revenue increased marginally to RMB5.38 billion.
However, due to a 9.6% increase in operating expenses, earnings before interest
and tax dropped 9.7% to RMB2.49 billion.
cumulative aircraft movements and passenger throughput fell 3.3% and 0.63% in
the first half of 2019. This is due to runway maintenance and the support for
important events. In addition, passenger throughput would likely fall further
due to the opening of Beijing Daxing Airport.
price as of 26 Feb is HK$6.33, giving rise to a market capitalisation of
Beijing Daxing Airport. Source: Google.com
the most prominent listed company is not the only option available to investors
who wish to partake in the sector growth. When one looks deeper, there could be
other interesting companies located elsewhere in the value chain worthy of your
case of an airline, I have shared four related sectors and several listed
companies. You may perform a similar search for other industries as well. Note
that due to the small size of local bourse, you may have to cast a wider net to
include the overseas market.
On a side
note, if Changi Airport becomes a listed entity, I think the vast majority of
local investors would definitely clamour for its shares considering it is our
national icon. I definitely would not mind being a proud shareholder too.
CS Jacky is a Remisier and Financial Adviser with Phillip Securities Pte Ltd. Graduated with a Bachelor in Business Administration (Finance), he has been investing in the stock market since 2010. He identifies companies with good prospect trading at a low valuation using a unique blend of fundamental, technical, and portfolio analysis. He also holds REITs and dividend paying shares. He holds regular seminar to share about market updates, investment insights of specific stocks in his watch list, and overall wealth management for retail investors. He is the owner-blogger of 'CS Jacky - 360 Wealth Management' and a guest writer for Value Invest Asia.