SINGAPORE (May 16): SIA Engineering (SIAEC) has seen its share price rise by 18.5% this year. But UOB Kay Hian believes its current valuation is unlikely to be sustainable.

According to UOB lead analyst K Ajith, the run-up in SIAEC’s stock was largely due to expectations of a special dividend.

SIAEC has recommended a final ordinary dividend of 9.0 cents and a special dividend of 5.0 cents per share for FY2016-17. Together with the interim dividend paid earlier, the total dividend payment for the year will be 18.0 cents per share – 4.0 cents per share higher than a year ago.

“Core earnings, however, were largely flat in FY17,” says Ajith. “Were it not for unexpected engine checks on a mature engine type, PW4000, in 4QFY17, earnings would have declined.”

In a report on Tuesday, Ajith says the PW4000-led 15% earnings growth in the fourth quarter is unlikely to repeat and “not reflective of longer-term growth prospects”.

As such, UOB is keeping its “sell” recommendation on the aircraft maintenance, repair, and overhaul (MRO) operator.

Without the divestment of its 10% stake in Hong Kong Aero Engine Services (HAESL), SIAEC would have seen earnings slip 2.6% lower at $172.0 million for the full year ended March.

Group revenue fell marginally to $1.10 billion in FY2016-17, 0.8% lower than a year ago.

 (See: SIA Engineering full-year earnings up 88% to $332.4 mil on one-off divestment gain)

“Revenue has been declining for the past three years,” says Ajith. “Going into FY18 and FY19, we still expect core net profit to be flat, despite factoring in higher revenue growth.”

However, the analyst has raised FY18 net profit estimates by 3% after factoring in higher profits from joint ventures due to potentially higher engine checks from Singapore Aero Engine Services (SAESL).

“SIAEC indicated that Trent series of engines could see higher shop visits in FY18 but advised that it is unsure if such checks could would be minor checks or more value added refurbishments,” says Ajith. “We have thus assumed a 60% rise in associate income for FY18.”

As a result, UOB is raising the target price for SIAEC to $3.50, from $3.30 previously.

“Market is pricing in a cyclical recovery but we believe it is premature to form such an opinion,” Ajith says. “Overall earnings growth for the next two years will be largely dependent on the successful growth of line maintenance ventures and aircraft utilisation on the A330-300 series of aircraft types.”

Shares of SIA Engineering are trading 2 cents lower at $3.96 as at 11.56am.