SINGAPORE (Oct 10): UOB KayHian is placing SIA Engineering’s “sell” recommendation and $3.60 target price under review pending the release of its interim earnings in November.
UOB has been bearish on SIAEC for almost three years. The stock now trades at a “more reasonable” 21 times FY18 forward earnings but the house prefers to wait for better catalysts before re-rating the stock.
These include stable staff costs, improving line maintenance earnings and higher JV and associate income or at least guidance along the same lines.
SIA Engineering’s stock price declined sharply following the recent selldown amid concerns over a 39 million stock placement and the removal of the stock from the Straits Times Index.
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In a Tuesday report, UOB analyst K Ajith says he would like to see concrete improvements in certain key areas of SIAEC’s business.
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The first is stable staff costs. “Ideally, we would need to see at least two quarters of stable staff costs, to make a case for an upgrade,” says the analyst. Up to 50% of SIAEC’s opex costs are labour-related but the group is finding it harder to pass on costs, particularly for its airframe maintenance segment.
The second is higher line maintenance revenue. While SIAEC performs line checks at 37 airports in 8 countries, the bulk of revenue still accrues from Singapore. However, aircraft arrivals out of Changi rose by 4.1% in Jul-Aug period and this bodes well for strong 2Q revenue.
In June, SIAEC also begun line maintenance checks at Kansai airport. The group has also signed a non-binding MOU with Air India Engineering Services (AIESL) to perform line maintenance and ancillary services at six airports in India.
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Finally, faced with greater competition, SIAEC has intensified its JVs over the past two quarters, forming JVs with Embraer, General Electric, Moog and Pratt & Whitney. While this is positive, Ajith says the JVs have relatively long gestation period. In FY17, JV and associate income rose just 2.4% y-o-y and growth was just under 2% in 1QFY18.
“SATS is our preferred pick in the aviation support services sector, given its relatively lower PE valuation and higher ROE,” adds the analyst.
As at 2.56pm, shares in SIAEC are trading 1 cent higher at $3.20.