Aviation – Singapore - UOB Kay Hian 2017-10-27: Expect A Strong Quarter For SIA, STE And SATS, Upgrade STE To BUY.

SINGAPORE AIRLINES LTD C6L.SI SINGAPORE TECH ENGINEERING LTD S63.SI SATS LTD. S58.SI SIA ENGINEERING CO LTD S59.SI

Aviation – Singapore - Results Preview: Expect A Strong Quarter For SIA, STE And SATS, Upgrade STE To BUY

Singapore Airlines (SIA), ST Engineering (STE) and SATS will report their latest quarterly results on 7, 8 and 9 November respectively.
We expect STE’s net profit to rise by at least 50% yoy, partly due to a low base. We also upgrade the stock to BUY with an unchanged target price of S$3.80.
We expect SATS to report a 24% yoy rise in net profit, aided by disposal gains.
SIA’s net profit should double yoy on the back of strong load factors.

We preview ST Engineering (STE) 3Q17 results and SATS’ and Singapore Airlines' 2QFY18 results.

3Q17 net profit expected to rise by at least 50% yoy on a low base; upgrade to BUY.
While ST Engineering lowered its 2H17 PBT guidance to “comparable” (STE speak for +/- 10%), we believe 3Q17 net profit will rise by at least 50% yoy due to:
1. a low base, which saw S$54m in provisions at ST Kinetics; and
2. lower qoq provision for the shipbuilding division (2Q17: the segment recorded a S$22m loss).
Also, ST Marine’s wholly-owned US subsidiary, VT Halter Marine, could benefit from higher defence-related ship repair contracts. A potential quid pro quo arrangement between the leaders of Singapore and the US might not be far-fetched following SIA’s S$19b order of Boeing aircraft.
We also note that ST Engineering could benefit from any corporate tax cuts proposed by President Trump. We upgrade STE to BUY with an unchanged target price of S$3.80.

Expect 24% yoy rise in 2QFY18 net profit to S$77m, assuming divestment gains, while core net profit is estimated to be flat at S$65m.
The partial disposal of SATS HK (ramp and pax handling) and Asia Freight Terminal (cargo handling) announced in March could have been completed in 2QFY18. If so, we expect S$12m in divestment gains. The deconsolidation of SATS HK is also expected to boost operating margins, offsetting partially the impact from the cessation of licencing fee rebates.
Operationally, Singapore gateway services revenue could rise by at least 5% yoy in 2QFY18, underpinned by higher flights and cargo handled at Changi, and this is expected to generate positive operating leverage for the segment.
On the catering side, we also expect improvement following a catering contract with Jetstar Asia effective 1 Aug 17.
We estimate SATS will report 6 S cents in interim dividend, unchanged from 1HFY17.

On a base case, we expect S$142m in 2QFY18 net profit, and S$121m in a bear case. The latter is premised on a 1 S cent decline in pax yields from our base assumption. The parent airline’s improved load factor is expected to be the primary earnings driver and we also expect pax yields will remain flat yoy in 2QFY18 (1QFY18: - 2% yoy).
Cargo operations are expected to be in the black on the back of strong yields and load factor.
We also estimate SIA will declare a 9 S cents dividend, unchanged from 1HFY17.

Most of the known negatives are reflected in the price, but not potential positives. The stock has declined post 2Q17 results, following management’s lower earnings guidance for 2017. However, this is mainly due to provisions for work that was contracted four years ago and is not indicative of adverse conditions at the marine segment.
Post 3Q17 results, we believe the stock will outperform as investors will look ahead and focus on enhanced capabilities and possibility a greater share of US defence ship repair work.
For 3Q17 and 9M17, we will be looking out for the extent of bad debt provisions, trade receivables as well as magnitude of ship building revenue and PBT decline. Any improvement in these data points will likely lend confidence to the stock.

The deconsolidation of SATS HK could skew revenue growth and operating margins; the latter favourably. Labour costs should also decline post consolidation. TFK is seen to be a wild card but impact to bottom line will not be significant.
We are also not too concerned about the local inflight catering. Part of the reason for the revenue has been due to aggressive pricing by SATS. We also believe that this will abate as yields stabilise.
We will seek greater clarity on SATS’ MOA with Turkish Airlines on the provision of inflight catering at the new airport, slated to be the world’s largest. We would also seek guidance on prospects for ground handling and catering contracts from Norwegian Air and Qantas.

While yields could stabilise in the current quarter, we believe that increased competition from the likes of Norwegian Air and Qantas could alter the status quo in the coming quarters. Cargo earnings, meanwhile, are expected to reverse into the black, following improved loads, and are likely to be sustained into 2018.
If reported earnings meet expectations, there could be some upside risk to our earnings estimate which is currently 13% below consensus.
We will also be watching out for renewed guidance on capex, following SIA’s order for 19 787-10s and 20 777-9’s, which carry a sticker price of S$19b. The MOU for the purchase was first announced in Feb 17 and we believe the deal will involve the trade-in of SIA’s B777-200’s.

Higher-than-expected earnings and forward guidance could lead to an upward re-rating for STE and SATS.

K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-27

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100

BUY Upgrade HOLD 3.800 Same 3.800

BUY Maintain BUY 5.400 Same 5.400

SELL Maintain SELL 3.600 Same 3.600