SINGAPORE (June 28): CIMB Research is downgrading SIA Engineering from "hold" to “reduce” with a lower price target of $3.86 in view of the stock’s expensive valuations and limited catalysts.
CIMB also recommends switching out of SIA Engineering into ST Engineering given to the latter’s structural “sweet spot” of smart nations and more defensive earnings profile with diversified business segments.
In a Tuesday report, analyst Lim Siew Khee says SIA’s divestment of its parent stake in SIA Engineering is unlikely as there are other avenues for the group to manage its balance sheet.
“We think there is no pressing need for SIA to divest its stake in SIA Engineering as the airline tries to manage its balance sheet. Sale and leaseback could be an alternative avenue. SIA’s expected FY19F net gearing of 26% is still considered the strongest vs. its regional peer average of 220%,” says Lim.
The outright sale of the group’s stake in the company, although possible, is also unfavourable in the analyst’s view, as she sees SIA Engineering as a “wingman” for SIA to invest in state-of-the-art aircraft expansion.
Although Lim thinks an earnings recovery is in sight for SIA Engineering after seeing multi-year declines, she believes there is also a downside risk to its airframe and component MRO revenue as well as operating losses, should there be further postponements in heavy checks among airlines.
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“Eagle Services has seen more engine work from Pratt & Whitney’s (P&W) PW4000 for the classic fleet of B747s in the recent year, thanks to lower fuel oil prices and airlines deciding to extend the usage of older aircraft,” she notes.
“However, the reality of stronger engines and the B747 being a mature market may still set in eventually. The erratic performance of Singapore Aero Engine Services (SAESL) may offset the strength in Eagle Services with the constant pressure from oversupply of Rolls Royce (RR) parts.”
As at 10.45am, shares of SIA Engineering and ST Engineering are both down by 2 cents at $4.15 and $3.70, respectively. Shares of SIA are trading 0.8% lower at $10.01.
