SINGAPORE (Feb 11): Maybank Kim Eng is maintaining its “buy” call on SIA Engineering (SIA EC) with a lower price target of $2.85 compared to $3 previously after the group reported a 40% y-o-y decline in 3Q19 earnings due to one-off items.

The research house has cut its FY19-21 PATMI estimates by 6%-13%, but remains positive on the stock’s medium-term outlook considering its management initiatives and current valuations.

In a Monday report, analyst Neel Sinha says he sees SIA EC’s dominant franchise at Changi Airport is undervalued given that the stock is trading a 15% discount, or -1 s.d., to its 10-year forward P/E mean.

While the analyst acknowledges that SIA EC’s latest financial reporting quarter was an “ugly” one, he believes it is “not as terrible as it looks optically”, given how core PATMI would have fallen by a much-lower 12% compared to the reported 40% excluding the one-off adjustments to associate/joint venture profit.

“The underlying trends are still soft but stabilising… Management is taking at measures to grow repair and overhaul (R&O) scale, as well as control costs to ‘right-size’ the business; efforts that have driven some EBITDA margin improvement in the past two quarters,” notes Sinha.

“SIA EC is investing in new areas in manufacturing technology for cabin interior parts, in-flight entertainment and connectivity systems, etc. The two key risks to our medium-term thesis is that the new initiatives take more than another 12-18 months to contribute and the adjustment process to lower maintenance, repair and overhaul (MRO) workload for new aircraft drags on longer than expected,” she adds.

On the other hand, OCBC Investment Research and Phillip Capital are maintaining their “hold” and “neutral” ratings on SIA EC while lowering their price target estimates to $2.47 and $2.66 previously, compared to the previous $2.64 and $2.81 targets.

In a Monday flash note, OCBC analyst Low Pei Han says she sees few catalysts for the stock going forward – except for less pricing pressure from airlines under a lower oil price environment, or a possible privatisation by SIA.

“Looking ahead, the group commented that the operating environment ‘remains challenging’. On its part, SIA Engineering will continue to focus on its transformation journey (may take two years from its commencement in Apr 2018) and investments in technologies, as well as manage its portfolio of JVs to drive sustainable growth,” notes Low.  

Phillip Capital, too, believes the outlook remains negative for SIA EC, as its core operations remain challenged by longer maintenance intervals and lighter work content.

“We were expecting the contribution from engine shop visits at the associates and JV to have stabilised, but this was marred by the one-time events,” comments analyst Richard Leow on the group’s latest set of results.

“We are cautious over further negative impact from restructuring of other associated and JV companies,” he adds.

As at 11:42am, shares in SIA EC are trading 3.6% lower at $2.44 or 1.84 times FY19E book, based on Maybank’s estimates.