SINGAPORE (Nov 7): Maybank Kim Eng and CIMB Research are maintaining their “hold” and “reduce” calls on SIA Engineering (SIA EC) at lower target prices of $3.50 from $3.70 respectively.
This comes after the group reported $38.1 million in earnings for 2Q18, 7.3% up from a year ago but missing both research houses’ expectations.
In a Tuesday report, Maybank analyst Neel Sinha says he is positive on the long-term growth potential of a number of the group’s new partnerships and joint ventures (JVs) announced this year – but the contributions are likely to take 6-8 quarters to materialise.
Sinha believes the business will continue to face high competition from its peers and original equipment manufacturers (OEMs), as well as structural changes in MRO cycles with new generation aircraft in the near-term.
As such, the analyst has cut FY18/FY19 profit estimates by 21-23% to factor in a slower rebound and higher costs at new ventures.
CIMB analyst Lim Siew Khee notes that lacklustre performance was due to a continuous slide in airframe repair and a lack of improvement in line maintenance, even as more work was transferred from hangars to apron.
“There are signs of effort to battle against the structural headwinds of high costs and competition. However, we think it will take time to bear fruit. Operating losses in airframe repair are likely to continue in the next few quarters,” says Lim in a Monday report.
“The high-cost base and more OEMs encroaching into the after-market service mean SIE needs a major facelift in productivity to stay in the game, in our view,” she adds.
Lim has cut her FY18-20 earnings per share (EPS) forecasts by 15-20% on slower revenue growth and higher costs.
In her view, the stock is still expensive at 20 times FY19 P/E against weak earnings growth but there is still a possibility of re-looking at the stock should the group make progress in narrowing its operating losses against airframe repair.
On the other hand, Phillip Capital has upgraded its view on SIA EC to “neutral” from “reduce” with a lower target price of $3.35 from $3.70 previously, which gives an implied FY18 forward P/E multiple of 24.6 times, compared against the STI’s next 12-month forward P/E multiple of 15 times.
The research house’s FY18 and FY19 PATMI projections are now 8.6% and 14.9% lower than previous estimates, respectively.
On the belief that SIA EC’s outlook remains challenging, analyst Richard Leow says the absence of strong catalysts will keep the group’s share price muted.
“However, SIA EC has a strong balance sheet with a net cash position, which it is utilising to start new ventures,” says Leow.
As at 10.51am, shares in SIA EC are trading 2 cents lower at $3.28.
