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Ready to fly? This agreement between the EU and ASEAN could be big!


Good news! ASEAN and the European Union finally signed an accord on 17 October 2022, that allows more passenger and cargo flights to be chartered between the two regions.

This opens up many opportunities for the various airlines and aerospace services companies in the region with higher expected flight frequencies in the region.

In Singapore and Malaysia, there are 4 such aviation companies that could stand to benefit the most from this…

#1 Singapore Airlines

Singapore Airlines (SIA) is an airline company mainly involved in the transport of passengers and cargo to various countries around the world.

It currently flies to 105 destinations across 37 countries and also has other business segments that provide engineering services.

SIA stands to gain from this accord significantly as Europe is its biggest source of passenger revenue currently at 32.3% of total revenue. Furthermore, from the cargo segment, Europe ranks second as the highest revenue source at 24.4%, after East Asia.

SIA has continued to recover with the re-opening of international borders. Revenue doubled from its low of S$3.8 billion in 2021 to S$7.6 billion in 2022.

Meanwhile, SIA has also managed to reduced its loss to S$962 Million from S$4.3 Billion over the same period.

SIA is currently trading at a price-to-book ratio of 1.2 times, quite in line with the historical average of 1.3 times from 2018 to 2021.

SIA could be a worth investment opportunity for the following reasons:

  1. Dominant position in the airline market in Singapore.
  2. Strong revenue exposure for passenger and cargo flights to Europe in line with the EU accord signing.
  3. Recovery back to pre-pandemic levels. Revenue expected to recover to S$16.0 billion in 2023 in line with 2020 level of S$15.8 billion.

Most analysts now have an OVERWEIGHT call on SIA, with an average target price of S$5.87. With share price trading at S$5.04, this implies an upside of 16.5%.

#2 SATS Singapore

SATS Singapore (SATS) is a provider of food and gateway services to airlines companies mainly. In its food division, it provides food to airlines, foodservice chains, retailers and institutions.

Meanwhile, it also provide gateway services such as airfreight handling, passenger services, ramp handling, baggage handling, security services, and aircraft interior & exterior cleaning.

SATS stands to benefit from the increased flight frequencies from the EU accord. The deal to acquire France-based Worldwide Flight Services would make it the world’s biggest global air cargo handler.

However, it made headlines when it wants to buy Paris-based air cargo handler Worldwide Flight Services (WFS) for up to $1.3 Billion Euros.

The planned S$1.7 Billion equity fundraising is still in the midst of discussion but the potential rights issue dilution has led to many investors selling SATS shares – pushing it down over 30% in just 2 weeks’ time.

Putting the deal aside, SATS is gradually recovering from the increased flights in Singapore and internationally. Revenue rebounded by 21.3% to S$1.2 billion in 2022 from S$970 million in 2021.

Likewise, it managed to reversed its loss of S$109.3 million in 2021 to a profit of S$4.3 million in 2022. Its cash position remained healthy with a cash ratio of 1.2 times currently, higher than 0.9 times in 2019.

SATS could be worth looking at for the following factors:

  1. Possibility of being the world’s biggest global air cargo handler with the deal to acquire Worldwide Flight Services (although some short-term pain is expected).
  2. Expected recovery back to pre-pandemic levels. Revenue expected to rebound to S$1.7 billion in 2023, similar to 2020 (S$1.9 billion).

Currently, SATS has an OVERWEIGHT call due mainly to the Worldwide Flight Services deal, with an average target price of SGD3.91. This implies an upside of 48.5% from the current share price of SGD2.63.

#3 A-Sonic Aerospace

A-Sonic Aerospace (ASA) is involved mainly in the business of providing aerospace engineering and logistic solutions services.

Despite being a small cap stock, ASA’s main customers include the big names like: Singapore Airlines, Air China Group, China Eastern Group, Shanghai Airlines, Eva Airways, Malaysian Airlines and many other more.

With an expected increase in passenger and cargo flight frequencies due to the EU accord, demand for ASA’s services is expected to increase in line with more maintenance and logistics services required.

With such a diversified revenue base in other countries, ASA weathered the pandemic pretty convincingly.

Revenue actually continued to grow from S$276.1 million in 2019 to S$617.2 million in 2021 – almost 300% jump in 2 years!

In the 1H2022, net profits also soared to a record high of S$7.6 million. This is a stark contrast to its 4 consecutive years of losses from 2014 to 2017, before returning to profitability in 2018.

Currently, ASA is trading at a low price-to-book ratio of 0.6 times, compared to the historical average (2018 to 2021) of 0.8 times. Meanwhile, dividend yield is at 1.6%.

ASA could be worth a good look at for the following reasons:

  1. Diversified revenue base, with services spanning airlines across the region.
  2. Opportunity for rapid revenue expansion in accordance to higher flight services demand from the EU accord.
  3. Cheap valuations due to investors’ unfamiliarity with this small cap stock

#4: Capital A Berhad (Air Asia)

Capital A Berhad (or formerly known as AirAsia) is mainly a low cost air travel company with flights to 128 destinations around the world.

It has recently also diversified into the businesses of online travel agent (flight + hotel), food & beverage, e-hailing, fintech (BigPay), and aerospace engineering.

AirAsia is gradually recovering from the pandemic with the recent re-opening of Malaysian and international borders.

It recorded its highest revenue of RM1.5 billion in second quarter of 2022 (2Q 2022) in the last two years.

While it is still making losses, its operating cash flow rebounded to RM273.9 million in 2Q 2022 from a loss of RM441.0 million in 1Q 2022. This marks a potential rebound for the best low-cost carrier in the world.

It even made headlines for selling a record-breaking 500,000 seats in 2 days on Sep 2022!

AirAsia could potentially be a worthwhile investment for the following factors:

  1. Reputation as the best low-cost aircraft carrier in the world.
  2. A pivot away from an airline company to digital lifestyle and travel company.
  3. Potential to benefit from increased flight frequencies to Europe.

Analysts in the market have AirAsia at an OVERWEIGHT call, with an average target price of RM$0.79. With share price trading at RM$0.62, this implies an upside of 21.7%.

Conclusion

The EU and ASEAN accord to increase the amount of flights between them is expected to benefit airline companies in Singapore and Malaysia.

With most economies now opened also to international travel, this augurs well for the air travel and aerospace services industries moving forward.

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