SINGAPORE (Nov 26): OCBC Investment Research is maintaining its “hold” call on SIA Engineering (SIA EC) with a fair value estimate of $2.64 on the belief that the stock has few catalysts for now.
In a Monday report, analyst Low Pei Han highlights how SIA EC’s share price dipped to a two-week low of $2.48 as at the close of last Friday, representing a correction of about 15% since OCBC’s downgrade on Nov 9 post the group’s release of its 2Q19 results.
“Recall that results were slightly below our expectations with the airframe and line maintenance segment seeing a 43% y-o-y fall in operating profit to $22.6 million in the quarter. A reduction in work volume and keen competition has weighed on results, and this may continue in the meantime, pressuring operating margins and hence possibly dividends in the future,” says Low.
In particular, she notes fewer ‘C’ checks maintenance in the Singapore base over 1H19 due to constraints by hangar capacity. Should aircraft spend a longer time parked in the hangar, this would mean missed opportunities to undertake maintenance work for other aircraft, in Low’s view.
She also believes the group’s ongoing measures to increase productivity, reduce costs and upgrade capabilities will take time to kick in.
As such, the analyst sees limited catalysts for SIA EC at the moment, save for pricing pressure from airlines under a lower oil price environment or a possible privatisation by its parent company, Singapore Airlines (SIA).
“With the dim outlook, we fine-tune our estimates as well as terminal growth assumption from 1% to 0.5%... Over the longer term, the competition from rivals such as Chinese MRO providers may remain unabated, though SIA EC is still relatively well-positioned with its strategic partnerships,” Low concludes.
As at 1:21pm, shares in SIA EC are trading 2 cents higher at $2.53 or 16.13 times FY19F book.
