■ Singapore Airshow starting this week (6 Feb); typically share price has positive correlation with newsflow on contracts/tie-ups
■ Completion of sale of associate ACTS should result in S$14.4m one-off gain in 4QFY18
Opportunity to buy on share price weakness. Over the last 7 months, SIA Engineering (SIE)’s share price has declined c.20% from the previous peak, owing to a combination of weaker-than-expected 1HFY18 earnings, removal from the STI index since September 2017, and an alleged bulk sale of shares at a discount. We now see an opportunity to buy on weakness. SIE’s forward P/E is now around the -1SD level relative to its 5-year average. Further, 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 (share price has risen by 8% on average over the last 5 Singapore Airshows on such announcements). Additionally, while revenues remained flat in 3QFY18, we saw a jump in JV earnings (primarily from SAESL, which is SIE’s Rolls-Royce engine JV) which could hint at some upswing in the engine MRO cycle. Upgrade to BUY with TP of S$3.86 (20% all-in return including c.4% dividend yield).
Not to forget the medium-term opportunities as they draw nearer. SIE has a new GE engine facility which is likely to be operational in 2019; it is slated to perform cabin retrofitting work on SIA’s legacy A380s (end of 2018 at the earliest); and there is the gradual ramp-up of its Japan line maintenance operations as well. We expect EPS growth to return to positive territory from FY19 onwards.
Tweaking earnings upward on higher JV profits. While we had slightly underestimated some operating costs (materials, staff cost), this is offset by raising estimated JV/associate profits. FY18/19F earnings are thus raised by c.10% each.
Our revised TP of S$3.86 is based on a blended valuation framework (PE, EV/EBITDA, dividend yield and DCF), and includes a 20% M&A/privatisation premium.
Key Risks to Our View:
We cannot rule out a lengthy period of weak MRO demand amid structural changes in the industry. Increasing competition could also lead to renewed stress on the margin front. Upside risk exists in the form of potential privatisation/M&A. (Read Report)
Source : DBS Group Research