SINGAPORE (Nov 30): UOB KayHian is maintaining “market weight” on the local aviation sector, while its top “buy” picks remain SATS and ST Engineering, which have been given price targets of $5.40 and $4.06, respectively.

The research house has lowered its full-year net profit estimate for ST Engineering by 3.1%, or $17 million, to $530 million from $547 million previously. This is to factor in an expected recognition of $20-25 million in impairment losses for 4Q18, largely due to the completion of the group’s divestment of Leeboy India (LBI).  

In a Friday report, analyst K Ajith recommends that shareholders of ST Engineering remain invested, as this write-down should be viewed as a one-off. In the longer run, he believes the sale of LBI will reduce ST Engineering’s cash burn and improve group efficiency.

“In 2016, ST Engineering similarly sold its speciality vehicle business and recognised a $50 million impairment. The impact on ST Engineering's divestment of LBI will be at most half of that and should lower EPS by just 0.8 S cents. On a core earnings basis, we expect ST Engineering to deliver 13% net profit growth in 2019,” says Ajith.

On SATS, the analyst is expecting overall capacity to continue rising such that the transfer of Singapore Airline’s (SIA) routes to Scoot – which would theoretically lead to lower meals provided by SATS – would not impact SATS in FY20.

“In fact, SATS could provide meals to Scoots passengers, though this is strictly an option by passengers. SATS’ ground handling operations would also be boosted by the transfer of 14 aircraft to Scoot as Silk Air's fleet would be replaced. We have not incorporated the changes in our model. For now, we note that SATS is trading at a more reasonable valuation of 20 times P/E vs the prior peak of 25 times,” he adds.

Meanwhile, Ajith believes SIA’s weak cash flow remains a concern, and continues to rate the stock at “hold” with a $10.20 target price and a suggested entry price of $9.20.

Although he views the group’s planned route changes as positive and likely to be accretive, he does not expect the move to spur a material improvement in cash flow.

Post the reduction in Silk Air's, Scoot's and SIA Cargo's capacities, UOB has raised its FY19 and FY20 net profit estimate for SIA by $6% and 9%, respectively – but lowers its projected FY19 final dividend to 10 cents from 15 cents as it believes SIA would need to conserve cash due to increasing debt burden.  

“As at 1HFY19, SIA's ending cash declined by 40%, despite the group taking on $1.38 billion in debt. We expect SIA's full-year total debt to rise by $2.6 billion to $6.9 billion, and interest cost to more than double in FY20 to $304 million,” concludes the analyst.

As at 3.49pm, shares in SATS, ST Engineering and SIA are trading at $4.79, $3.53 and $9.53, respectively.