SINGAPORE (Dec 18): Daiwa is keeping SIA Engineering (SIAEC) at “outperform” with a lower target price of $3.56 compared to $4.10 previously, in line with lower earnings forecasts over the next three years as well as tapering FY21-28 earnings growth rate for the group’s line maintenance division.
In a report last Friday, analyst Royston Tan notes that operating margins have likely bottomed for the group after it saw some positives in 2Q18 results on an adjusted basis.
In his view, earnings from SIAEC’s repair and overhaul division – which remained loss-making over the latest quarter due to poor performance by its fleet management business – are now likely to achieve breakeven only in FY20 versus Daiwa’s earlier expectation of FY19.
Tan has therefore cut the group’s FY18-20 earnings per share (EPS) forecasts by 6-7% to reflect lower revenue, the negative impact of forex-related and provision charges, as well as higher operational expenses as guided by the group’s management, in association with upfront costs incurred by its line maintenance division in its expansion foray.
The analyst nevertheless highlights SIAEC as a prime candidate to capitalise on burgeoning maintenance, repair and overhaul (MRO) demand over the coming decade, and highlights that FY1920 EPS estimates are 9-12% above consensus on expectations on a swifter turnaround in the group’s repair & overhaul division.
“SIAEC’s strong JV/associates performance is likely to continue in FY18/19, bolstered by recent joint venture (JV) collaborations with OEM heavyweights such as GE and Boeing. We believe progressive earnings from these strategic partnerships will more than offset the decline in work volume from the PW4000 engines upon phasing out of the B747,” concludes Tan.
As at 11:38am, shares in SIAEC are trading 1 cent higher at $3.12, or 16.5 times FY20E PER.
