ComfortDelgro – DBSV
Opportunity within turmOIL
• Market overpricing risk of high oil price in SIA and CD
• Raised oil price assumptions to stay on the conservative side
• Demand and trade are key for airlines and container liners, while oil accounts for a relatively small proportion of land transport operators’ costs
• Our picks are SIA for rebound and CD for value
Opportunity within turmoil. We believe market has more than factored in the current high prices due to the current Mid-East turmoil. Opportunity to buy SIA, which seems oversold, and CD, which offers value.
Raising oil price assumptions. No one is certain how long the current Mid-East turmoil will last, or if it will spread. To stay on the conservative side of our earnings forecasts, we have raised our oil/jet fuel/ bunker price assumptions up by 10-20%, which has resulted in a downward revision in earnings of 4%-10%. At current oil price, we believe margins would no doubt be squeezed, but these companies should still remain profitable. We summarise our views for the respective subsectors:
• Air: At US$125/130 per barrel, this level of jet fuel price is high but manageable for the airlines. We believe demand is still the key for airlines and see SIA to be better poised to pass on costs.
• Land: Fuel accounts for c.9-15% operators’ topline and a US$10/bbl change in oil price could impact bottomline by c.7-9%. We believe CD will be more resilient vis-à-vis SMRT in this current environment given it has hedged 20% of 2011 requirements.
• Sea: Trade growth is the key factor driving NOL’s profitability. We believe rising bunker costs will not impact NOL’s earnings too significantly, as long as there is no demand destruction.
Buy SIA for rebound potential; CD for value. At current share prices, our analysis (based on our forecasting model) suggests that the market is factoring in jet fuel price of US$150 for SIA and oil price of US$130 for CD, which is way above current levels (Jet fuel: US$130; WTI: US$105). Given our view that SIA was sold down mainly on concerns of high oil prices, we believe SIA should offer the strongest rebound potential, if oil price retreats. Our picks are SIA (Buy, TP: S$17.30) and CD (Buy, TP: S$1.86). We maintain our Hold recommendations for NOL (TP S$2.15), MRT (TP lowered to S$2.03) and TGR (TP lowered to S$1.60).