Why Singapore haze won't choke transportation stocks

Impact likely limited to "short-term bump".

Transportation stocks will not be weighed heavily by Singapore's worsening haze problem, according to Maybank Kim Eng's latest sector report, as investors have historically not given too much importance on this annual annoyance when making their investment decisions.

Here's more from Maybank:

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.