SINGAPORE (July 26): DBS Group Research is maintaining its “hold” on SIA Engineering (SIE) given 1Q18 net profits came in below expectations.
In the near term, DBS sees a lack of earnings drivers for SIE, with line maintenance the only growth area.
In a Wednesday report, analyst Suvro Sarkar says structural challenges remain with fleet management suffering from OEM encroachment and heavy maintenance seeing lower check intervals from newer aircraft models made from more durable materials.
However, developments on the engine shopfront are positive in terms of longer-term positioning.
Sarkar says the Pratt & Whitney deal will service the PW1100G-JM engines – one of two options for the A320neo aircraft, which is expected to be the largest aircraft type (together with the A320ceo) in terms of MRO spend over the next 10 years.
Meanwhile the new JV with GE Aviation will service engines for the Boeing 777 family, which is expected to be the 4th largest aircraft fleet in terms of MRO spend by 2027.
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Given the lacklustre near-term earnings outlook, positive catalysts for the stock would mostly involve M&A prospects.
This could be a merger with ST Aerospace or some other MRO company, or privatisation by parent Singapore Airlines, says Sarkar.
“Our unchanged TP of S$3.84 is based on a blended valuation framework (PE, EV/EBITDA, dividend yield and DCF), and includes a 20% M&A/privatisation premium.”
Shares in SIA Engineering are down 12 cents at $3.75.
