SINGAPORE (May 17): Analysts believe SIA Engineering Company (SIAEC) could overcome near-term challenges and has positioned itself for longer-term growth.

“Over the near-term, we expect the core business to stay muted as the industry shifts towards an increase in demand for lower margin Line Maintenance on the new aircraft/engine models,” says OCBC Investment Research’s lead analyst Eugene Chua in a report on Wednesday.

“However, we expect SIAEC to continue to benefit from more Trent 1000 (used on B787) engine checks due to problems with the engine blades, which require workshop visits for the affected engines,” he adds. “We believe SIAEC is well positioned for longer-term growth through its partnerships with both aircraft and engine OEMs.”

OCBC is keeping its “buy” call on SIAEC with an unchanged fair value estimate of $3.70.

SIAEC saw its earnings tumble 44.6% to $184.1 million in the FY18 ended March on the absence of a one-off gain of $178 million from the divestment of HAESL a year ago, partially mitigated by a one-off $14.3 million surplus on the disposal of an associated company in 4Q18.

See: SIA Engineering posts 19.8% increase in 4Q earnings to $55 mil; declares 9 cents dividend

Excluding these one-offs, SIAEC’s adjusted PATMI would have dipped just 1.3% to $170 million in FY18 compared to $172 million a year ago, according to Phillip Securities Research.

“The outlook is improving, but remains challenging,” says analyst Richard Leow in a report on Friday.

“Management appears to have some visibility on the pipeline for engine shop visits [but] our view is that even when engine shop visits return, the long-term normalised profit contribution will still be lower than historical level, due to lower work content,” says Leow. “At the same time, competition from other MRO players is not expected to abate.”

Nonetheless, Leow believes that the return of engine shop visits will be a positive catalyst for re-rating, even though he adds that the profit recovery is expected to be L-shaped.

Phillip is keeping its “accumulate” rating on SIAEC with a higher target price of $3.57, raised from $3.51 previously.

Looking ahead, analysts say SIAEC’s earnings growth is likely to be driven by contribution from associates and joint ventures.

“Stay invested,” says UOB Kay Hian analyst K Ajith in a report on Thursday. “SIAEC is rapidly investing in new JVs to offset the decline in airframe maintenance. The gestation time for such returns might not be immediate but it will entrench SIAEC’s position as a leading maintenance, repair and overhaul (MRO) player.”

UOB is keeping its “buy” call on SIAEC with a lower target price of $3.80, from $4.00 previously.

“While 4Q18 JV and associate income fell short of expectations, revenue from engine maintenance segment rose 28% y-o-y in 2H18 – the fastest pace in more than five years,” Ajith says. “In addition, SIAEC expects this segment to grow further in FY19 and plans to grow its line maintenance earnings.”

“Given that the latter is an asset-light business, the operating leverage should be high,” he adds.

As at 4.19pm, shares of SIAEC are trading 1 cent higher at $3.32. According to UOB valuations, this implies an estimated price-to-earnings multiplier of 19.3 times and a dividend yield of 4.7% for FY19.