28 May 2018, Asia Pacific – The Kuala Lumpur-Singapore high-speed rail project has been officially cancelled according to a Reuters report. We had previously highlighted this key risk in our 15th May 2018 report.
See our previous 15th May 2018 report:
Following the termination of this project, we assess the implications on the airlines and aviation industry. Investors have been discounting the potential earnings loss from traffic being diverted from air to rail when the HSR is completed when the official agreement between Malaysia and Singapore was first made on 19 February 2013. The termination of this project will be beneficial to the Malaysia and Singapore airlines, airports and service providers, in our view. Specifically, this would be positive for AirAsia Group (AAGB:MK), Changi Airport, Jetstar Asia, Malaysia Airlines, Malaysia Airports (MAHB:MK), Malindo Air, SATS (SATS:SP), SIA Engineering (SIE:SP) and Singapore Airlines (SIA:SP).
KEY AIRLINE BENEFICIARIES:
The Kuala Lumpur-Singapore air route is the busiest international city pair in the world in terms of flight frequencies and this passenger market has more than doubled in the past 10 years, with passenger traffic growing at around 12% per annum.
#1 Jetstar Asia
Among the airlines, Jetstar Asia, which is partially owned by Qantas Airways (QAN:AU), is the biggest beneficiary. Jetstar Asia has a 10% market share on the KL-SG route which contributes 10% of its passengers carried based on our estimates.
This is followed by AirAsia which has a 25% market share on the KL-Singapore route. The Kuala Lumpur-Singapore route contributes 4% of AirAsia Malaysia’s passengers carried based on our estimates and is considered as a high profit margin flight sector. The KL-SG HSR would also have resulted in cutbacks on the Kuala Lumpur-Singapore route which feeds connecting traffic into AirAsia’s hub at Kuala Lumpur.
#3 Singapore Airlines
Singapore Airlines Group (comprising of Singapore Airlines, SilkAir, Scoot) have a combined market share of 30% on the Kuala Lumpur-Singapore route. The Kuala Lumpur-Singapore route contributes 4% of SIA Group’s passengers carried based on our estimates and is considered as a high profit margin flight sector. The KL-SG HSR would also have resulted in cutbacks on the Singapore-Kuala Lumpur route which feeds connecting traffic into SIA Group’s hub at Changi Airport.
#4 Malaysia Airlines
Malaysia Airlines Group (comprising of Malaysia Airlines and Firefly) has a combined 24% market share on this route. The Kuala Lumpur-Singapore route contributes 3% of its passengers carried based on our estimates and is considered as a high profit margin flight sector.
#5 Malindo Air
Malindo Air, partially owned by Lion Air, has a 9% market share on the KL-SG route which contributes 3% of its passengers carried based on our estimates.
Chart: Airlines exposure to Kuala Lumpur-Singapore route in terms of the number of passengers carried (2018)
Chart: Airline market share on Kuala Lumpur-Singapore route (2018)
KEY AIRPORT AND AIRPORT SERVICE PROVIDER BENEFICIARIES:
The Malaysia and Singapore-based airports and airport service providers are also key beneficiaries of the cancellation of the KL-SG HSR project.
The Kuala Lumpur-Singapore route is the second busiest route for Singapore Changi International Airport, contributing 8% of its total aircraft movements based on our estimates. Therefore, the termination of the HSR is beneficial for SATS (SATS:SP) and SIA Engineering (SIE:SP) which are the dominant ground handling and line maintenance service providers at Changi Airport.
The Singapore route is the second busiest international route for Malaysia Airports Holding Berhad (MAHB:MK), contributing 6% of its total aircraft movements based on our estimates so the HSR cancellation will be highly positive for MAHB as well.
Chart: Exposure to Singapore/Malaysia flights (2018)
Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.
Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report.
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