Haze impact will not last long; we stay positive on SIAEC, SATS and ComfortDelGro. The impact of haze, while a yearly affair and the worst ever so far this year, is still likely to be a near-term bump on the road for transportation sector stocks. Historically, investors have been unfazed by the haze, and we believe that any negative reaction to this presents opportunities to accumulate the undervalued transportation sector stocks that we favour. We reiterate our positive stance on SIAEC (BUY, TP: SGD6.16), SATS (BUY, TP: SGD3.90) and ComfortDelGro (BUY, TP: SGD2.33).

From haze to clear air (almost) in a week. Indonesia sent Singapore the unwanted “gift” of the worst-polluted air ever last week. The Pollutant Standard Index (PSI) shot up to hazardous levels of more than 400 points on 21 June, surpassing the previous peaks of 226 points (Sep 1997) and 128 points (Oct 2006). However, the smoke has subsided just as quickly as it came on the back of shifts in wind direction and, perhaps, prompt G2G action. At the time of writing, the pollution index has fallen to 38 and the horizon is visible again.

But what if the haze returns and stays? Bush fires in Indonesia typically occur at this time of year due to aggressive land clearing operations by local farmers, but the impact this year has been much worse than in previous years. The air has cleared this week but we have reviewed our earnings forecasts for the transportation stocks in case the situation takes a turn for the worse again.

SIA, SIAEC & SMRT most exposed. For the land transport stocks, we estimate SMRT and ComfortDelGro would suffer a weekly earnings impact of SGD2m and SGD1.4m (or 2.0% and 0.5% of annual profit) respectively for every 15% reduction in fare revenue. SIA and SIAEC too would be exposed as Singapore is their main operating base, but it is not possible to assess the impact on aviation stock earnings, as there are too many moving parts. Inbound traffic could be hit but this could be compensated for by more outbound traffic.

Historically, no impact on stocks as long as haze lasts less than a month. We observed no material adverse reaction during the more severe hazy days of Sep 1997 and Oct 2006, which generally lasted about a month. We remain sanguine about the situation as long as the haze does not last for more than a month this time round too. Using a far worse example to gauge downside, the SARS epidemic impacted aviation stocks by almost 20% at the worst, but land transport stocks were unscathed.

History: Our analysis of historical data shows that there was no significant decline in rail and bus traffic when air pollution levels last peaked in 2006. As a historical reference, ridership on the public transport network was most disrupted during the SARS period in 2003, when traffic on SMRT’s bus/rail network declined by 11/14% MoM during the peak of the crisis in Apr 2003.

Current: We believe that a substantial decline in ridership is possible if the current crisis worsens. Media reports highlighted anecdotal evidence of companies allowing their employees to work from home when air pollution levels hit their recent peaks. We believe that SMRT and SBST, a subsidiary of ComfortDelGro, could be negatively impacted, as they derive a majority of their revenue from fare-based business in Singapore. Given the diversity of its operations, ComfortDelGro will be less affected.

Earnings impact: We assess the earnings impact of a reduction in fare revenue on the stocks under our coverage. SMRT and ComfortDelGro generate bus and rail fare revenue of c.SGD14-16m a week. We estimate SMRT and ComfortDelGro would suffer a weekly earnings impact of SGD2m and SGD1.4m (or 2.0% and 0.5% of annual profit) respectively for every 15% reduction in fare revenue.

Aviation – No major flight disruptions, yet

History: During previous peak air pollution periods, Changi Airport continued to operate despite reduced visibility. While seasonal effects could have exaggerated the decline, visitor arrivals fell by 10/11% MoM in Sep/Oct 1997. In Sep 2006, visitor arrivals declined by 16% MoM, but quickly rebounded by 16% in the following month.

Current: The Civil Aviation Authority of Singapore (CAAS) responded to reduced visibility from the haze by increasing the times for take-off and landing last week. We have yet to see major flight disruptions, but do not rule out a partial closure of the airport if the situation worsens. SIA has responded by waiving administrative charges for refunds, rebooking and re-routing for a specified period. Outbound traffic could receive a boost as a means to escape the haze. According to a Business Times report on 25 Jun 2013, some Singaporeans have paid a premium of at least 30% on their air fares to leave the country. Based on commentaries by travel agents, there was an overall increase in revenue of 10-40% last week. Any worsening of the haze situation would affect inbound tourism traffic as visitors delay or cancel their trips to Singapore.

Earnings impact: Given the complexity of their operations, it is not possible to quantitatively assess the earnings impact on the aviation companies. While airlines could respond by adjusting their flight schedules to adapt to cancellations, we believe that earnings would be materially impacted if the situation is prolonged and travel demand collapses, like that experienced during the SARS period in 2003. Among the aviation service providers, we expect SATS to be the first to be impacted due to its dependency on passenger throughput (inflight catering and passenger handling). Due to its significant exposure to the line maintenance market at Changi Airport, we expect earnings at SIAEC to be affected when flights get cancelled. As a conglomerate, STE will be the least affected by haze-related disruptions.

Source: Maybank Kim Eng Research - 27 Jun 2013