SINGAPORE (Feb 6): DBS Vickers Securities and Maybank Kim Eng are maintaining their “hold” recommendations on SIA Engineering Company (SIAEC) at the respective target price estimates of $3.58 and $3.70.
Both research houses note a challenging near-term outlook for the stock, mainly due to uncertainty regarding the company’s MRO (maintenance, repair and overhaul) workload.
To recap, the engineering unit of Singapore Airlines (SIA) last Friday posted a 6.5% increase in 3Q earnings to $52.6 million.
SIAEC’s joint venture (JV) and associate profit was notably up q-o-q after three quarters of weakness; while associate profits grew by about $4 million for the quarter, profit from JVs notably increased by $9.4 million on-quarter to $14.3 million for the period.
(See also: SIA Engineering reports 6.5% rise in 3Q earnings to $52.6 mil on one-off gain and absence of provisions)
Despite this, DBS maintains that it remains “sceptical about a sustained recovery” in contributions from the JV and associate segment. The research house now expects a full-year dividend of 12.5 cents in FY17/18, which is roughly in line with the company’s payout policy of 85-90% of core earnings.
“While fundamental weakness in the widebody MRO space due to lower work content and longer intervals between checks on newer aircraft/engine models continues to cast a shadow on SIAEC’s future earnings projections, we think the possibility of a special dividend at the year-end, as well privatisation prospects by parent SIA, should continue to provide some support to SIE’s share price,” comments DBS analyst Suvro Sarkar in a Monday report.
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Sarkar also expects the company’s engine repair and overhaul business, which accounts for the bulk of its JV takings, will continue to face structural issues – as the company’s earnings upswing in 3Q is “more a timing/recognition issue rather than an indicator of sustainable recovery”.
“SIAEC is a beneficiary of longterm trend of rising air travel in the region. Its strategy of pursuing partnerships with key OEM component and aircraft manufacturers positions it competitively in the marketplace,” add Maybank analysts Derrick Heng and Neel Sinha in a separate report on Monday.
Although the company’s recent 3Q17 results were slightly lower than Maybank’s estimates, Heng and Sinha believe it was a “decent quarter” nonetheless.
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“But the near term growth outlook is [for SIAEC] challenging with global economic uncertainties affecting demand and the recent fleet upgrades undertaken by a number of its customers affecting MRO workload,” they conclude.
As at 10.34am, shares of SIAEC are trading 0.6% higher at $3.54.
