SINGAPORE (Jan 31): UOB Kay Hian is maintaining “overweight” on Singapore’s aviation sector with expectations of Singapore Airlines and ST Engineering to surprise on the downside in the ongoing earnings reporting season.
The research house’s top picks are SATS and ST Engineering, both of which are rated “buy” with the respective price targets of $5.60 and $4.06.
In a Thursday report, analyst K Ajith advises investors to remain invested in ST Engineering despite his lower-than-consensus 4Q18 estimate of $149 million versus street expectations of $169 million – as he nonetheless expects topline growth to show a marked improvement due to guidance on higher orderbook recognition in the latest quarter.
Meanwhile, the analyst remains “neutral” on SIA as he expects the group report $227 million in net profit for 3Q19 – representing a 21% y-o-y decline based on pre-SFRS 1-based numbers, on the back of higher fuel costs and lower pax yields.
UOB has a “hold” call on SIA with a $10.20 target price.
“SIA is likely to revise upwards its 3Q18 net profit by about $100 million to factor in lower depreciation and amortisation (D&A) and hence the y-o-y decline in 3QFY19 earnings could be significantly higher... We also expect the parent airline’s pax yield to decline 0.8% yoy in 3QFY18 but RASK to rise by 1.4% y-o-y,” says Ajith.
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Although the analyst forecasts SATS’s 3Q19 net profit to come in flat y-o-y this season as revenue growth for gateway services could be affected by a decline in cargo handled, he expects underlying net profit to rise by mid-single-digits due to higher food solutions revenue from China and the cruise business, along with q-o-q improvement in associate earnings.
He also believes SATS will raise its final dividend payout to 13 cents per share this quarter from 12 cents previously.
“We believe SATS is sufficiently diversified to weather a slowdown in cargo throughput. We are also encouraged by SATS’ recent investments to build a new central kitchen in Tianjin, and ground handling and catering centres at Daxing in Beijing,” says Ajith.
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Lastly, Ajith believes SIA Engineering’s 2H19 net profit will rise by about 5.7% y-o-y, underpinned by engine associates and joint ventures (JV) despite weak operating earnings.
The stock has been rated “buy” with a $2.70 price target, with a slowing pace of revenue decline and stable margins being potential catalysts for a re-rating.
As at 11:09am, shares in ST Engineering, SIA, SATS and SIA Engineering trading at $3.72, $9.75, $4.82 and $2.50, respectively.
