SINGAPORE (Feb 5): OCBC Investment Research and DBS are upgrading their calls on SIA Engineering Company (SIAEC) to “buy” from “hold” previously with a higher fair value and target price of $3.70 and $3.86, respectively.

This comes after the group last week reported 3Q18 earnings of $54.8 million, up 4.2% from $52.6 million on higher share of profits of associated and JV companies – particularly the Singapore Aero Engine Services (SAESL) JV, which deals in Rolls Royce engine & component repair and overhaul.

See: SIA Engineering posts 4.2% increase in 3Q earnings to $54.8 mil

In a Monday report, OCBC lead analyst Eugene Chua says he expects SIAEC’s earnings to be lifted by its improving engine maintenance, repair & overhaul (MRO) segment going forward, even as the core business is expected to stay muted in the near-term due to ongoing structural changes in the industry.

OCBC’s FY18-FY22F PATMI estimates have thus been raised by 0-10% on these expectations, with its revised fair value of $3.70 supported by a FY19F dividend yield of 3.9% based on the stock’s 2 Feb closing price of $3.33.

“In our view, SIAEC will 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. Over the longer-term, we remain positive over SIAEC’s strategy to pursue expansion of its LM network globally, as well as its partnerships with Pratt & Whitney and GE to provide MRO services of the engines that are being used on the new aircraft models,” elaborates Chua.

DBS lead analyst Suvro Sarkar now sees an opportunity to “buy” SIA EC on its current share price weakness, given how how the stock’s forward P/E is currently around the -1SD level relative to its five-year average.

“With the Singapore Airshow starting this week, we expect some announcements of contracts and/or partnerships, which could be a catalyst for an upward re-rating of the shares. Additionally, while revenues remained flat in 3Q18, we saw a jump in JV earnings which could hint at some upswing in the engine MRO cycle,” notes Sarkar.

In the analyst’s opinion, the slight underestimation of some operating costs has been offset by raising estimated JV/associate profits, resulting in higher FY18/19F earnings estimates by about 10% each.

Likewise, Phillip Capital has raised its FY18E and FY19E estimates for contribution from associates and joint ventures (JVs) by 32% and 16%, respectively, resulting in 15.6% and 5.6% higher overall FY18E and FY19E PATMI estimates than previously.

The research house has also upgraded its call on SIA EC to “accumulate” from “neutral”, with a higher target price of $3.51 compared to $3.35 previously.

Phillip is also in the view that SIA EC’s FY17 dividend distribution of 13 cents should be sustainable for FY18E given the group’s positive free cash flow, dividends received from associated & JV companies, and net cash position.

It however believes that the long-term normalised contribution will not exceed the historical level.

Meanwhile, UOB Kay Hian is reiterating its “buy” recommendation on the stock with a target price of $4, which implies that the stock would trade at ex-cash P/E of 22.6 times and 20.2 times FY18-19 core earnings, respectively.

Aside from the higher JV & associate contributions, UOB analyst K Ajith says the declines in staff and subcontract costs over the past quarter come as positive surprises, as staff cost has not declined in almost two years and accounted for more than 46% of total revenue in 3Q18.

“This bodes well for the future as staff cost has consistently risen yoy since 1QFY17. As expected, JV & associate income continued to rise yoy for the fourth consecutive quarter and accounted for an astonishing 67.7% of 3QFY18 earnings. Going forward, we expect JV & associate income to rise further on the back of higher engine shop visits,” comments Ajith.

As at 11:45am, shares in SIA EC are trading 2 cents lower at $3.31, or 22 times FY18F P/E based on OCBC’s estimates.