SINGAPORE (July 20): DBS Vickers Securities and Phillip Capital are maintaining “buy” and “accumulate” calls on SIA Engineering (SIA EC) with the respective target prices of $3.92 and $3.56.

This comes after SIA EC recorded earnings of $40.5 million for the 1Q ended June, representing a 10.4% increase from a year ago.

While DBS’s target price is based on a blended valuation framework and includes a 20% merger and acquisition (M&A) / privatisation premium, Phillip lower target price compared to $3.57 previously gives an implied FY19E forward P/E multiple of 22 times.  

In a Friday report, DBS analyst Suvro Sarkar notes that SIA EC’s forward valuation ratios continue to remain below -1 standard deviation (SD) levels, which he views as a good investing opportunity in light of positive earnings drivers ahead.

These would include an upswing in the engine MRO cycle boosted by visits from problematic Trent 1000 engines, cabin retro-fitting work on SIA’s legacy A380s which are expected to come in at end-2018, and the group’s new GE engine collaboration with its potential to be a large contributor to JV/associate income.

Sarkar also points out that an expansion the line maintenance segment in Japan, with a view towards other countries as well, could further help to drive SIA EC’s topline.

“The adverse effect on the heavy maintenance segment of longer check intervals and lower check content of newer generation aircraft should be mostly offset by a growing fleet size, especially in Asia Pacific,” says the analyst.

While Phillip Capital analyst Richard Leow thinks the outlook is improving for SIA EC, he expects continued challenges for the group’s core company operations on top of ongoing competition from other MRO players.

As such, the research house has adjusted for estimates for FY19E core EBIT lower by 3.7%, with 16.8% higher associates/JV contribution. The resultant FY19E PATMI is 9% higher than previous estimates with a 0.5% lower FY20E PATMI.

“SIA EC has been investing in various productivity and revenue generation activities; and we await evidence of their maturity to contribute positively,” notes Leow, who nonetheless continues to like the stock for its strong balance sheet and positive free cash flow.

Shares in SIA EC were at $3.20, or 20.5 times FY19F book based on DBS estimates, before the midday trading break.