IS this the end of the good times for transport and energy sector stocks in Singapore, or have the fears over the impact of rising oil prices been grossly overdone? That is the billion dollar question as the world faces the prospect of the worst bout of energy price inflation since the early 1970s.

Aviation, shipping and transport stocks have fallen to year-lows in recent weeks as oil prices peaked at record highs after having tripled over the last year. Singapore Airlines (SIA) is struggling to keep above the $15.90 level, while Neptune Orient Lines (NOL) is currently almost 50 per cent down from the $1.90 price at which global investors bought the shares last year during the group's international share placement exercise.

Meanwhile, Cycle & Carriage (C&C) has slumped to October 1998 levels amid concerns that higher pump prices will drive down car sales, adding to jitters over the impending loss of its Mercedes Benz wholesale franchise.

Weighed down: Other struggling stocks include marine counters like Osprey Maritime and Samudera Shipping, and transport operators Comfort group, Tibs Holdings and Delgro. Meanwhile, energy and infrastructure stocks like Keppel Fels and Singapore Petroleum have been weighed down by fears that higher crude oil prices will erode their margins.

Some of these counters have recovered from their recent lows ahead of next week's Opec meeting. But some OECD-based analysts have recently expressed doubt if oil prices will indeed fall back to under US$20, and point out that the unprecedented global economic growth has raised the demand for oil to levels which cannot be met by previous supply quotas. Even so, the fear over oil prices is clearly overdone. For one thing, it is unrealistic to expect the price per barrel to remain above US$30 for long, especially with the US threatening to release its oil reserves and producers like non-Opec Mexico threatening to stop acting in concert with Opec.

And even if the price stayed above US$20, it is important to note that fuel costs are just one of a whole array of operating costs. While a high oil price may cap bottomline growth, it is not sufficient in itself to deliver a debilitating blow to strong firms.

Take SIA for instance. Fuel costs account for about 15 per cent of the company's operating expenditure, and every US$1 rise per barrel is estimated to add about $50 million to its fuel bill. This is hardly the kind of stuff to blow away a company whose net earnings surpass $1 billion. SIA's hedging policy and its recovering load factor have also helped blunt the impact of a fuel price hike.

Analysts estimate that a one per cent rise in yield would add back about $60 million to the company's bottom line, assuming other factors remain constant. And yield has been rising by about 3 per cent on a year-on-year basis in recent months. There is little reason why the stock should be struggling at its $15.90 share buy-back price when analysts are giving it a fair value of about $22.

Then there is NOL, which has been beaten down to October 1998 lows despite the fact that bunker fuel accounts for only 5 to 7 per cent of its operating expenditure.

Interest rates have also played a major role in weighing down NOL's stock, given the company's $3.3 billion in outstanding borrowings.

But analysts estimate that a 50-basis-point hike in interest rate would mean just an additional $13 million in interest costs per year -- not exactly the kind of numbers which would derail the company's growth. NOL's bottom line is already recovering on the back of higher freight rates, improving loads and a reduced debt burden, with its debt-to-equity ratio now standing at 2.8 times, against 14.6 times a year ago.

Astra deal: Then there is long-suffering C&C. While pump prices do affect the purchasing decisions of marginal car buyers, it should not figure greatly in the calculations of those who are willing to dole out some $200,000 for a Mercedes Benz and over $1,000 per month on loan instalments.

Instead of being distracted by petrol prices or the loss of its Mercedes Benz wholesale franchise, investors should instead be watching to see if C&C is successful in clinching the controlling stake in Indonesian car giant Astra International, which its Bank Restructuring Agency is set to announce this week.

Whatever the outcome of next week's Opec meeting, one thing is certain. It is unrealistic to expect oil prices to stay at current peaks for long. And a closer evaluation suggests that there is little justification for counters like SIA, NOL and C&C to languish at current price levels.


By Ven Screenivasan