Aviation – Singapore - UOB Kay Hian 2019-01-31: SIA & STE Could Surprise On The Downside; The Latter Due To One-Off Impairment Charges

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SINGAPORE AIRLINES LTD (SGX:C6L) SINGAPORE TECH ENGINEERING LTD (SGX:S63) SATS LTD. (SGX:S58) SIA ENGINEERING CO LTD (SGX:S59)

Aviation – Singapore - SIA & STE Could Surprise On The Downside; The Latter Due To One-Off Impairment Charges

• We expect SINGAPORE AIRLINES LTD (SGX:C6L) to report S$227m in net profit for 3QFY19, a 21% y-o-y decline on pre- SFRS 1-based numbers, and expect Singapore Airlines to be more cautious in its forward guidance.
• For SINGAPORE TECH ENGINEERING LTD (SGX:S63), we expect 4Q18 earnings to be hit by an impairment loss from the divestment of VT Leeboy India.
• For SATS LTD. (SGX:S58), we expect flat headline net profit but mid-to single-digit growth in underlying 3QFY19 net profit.
• SIA ENGINEERING CO LTD (SGX:S59) could be a wild card, with potential upside surprise from its engine JV.
• Top picks are SATS and ST Engineering.

WHAT’S NEW

SIA and ST Engineering could surprise to the downside in the upcoming results, but we remain positive on ST Engineering.

• We expect SINGAPORE AIRLINES LTD (SGX:C6L) to report S$211m in net profit for 3QFY19, a 21% y-o-y decline on pre-SFRS1 adjustment on 3QFY18 net profit.
• For SINGAPORE TECH ENGINEERING LTD (SGX:S63, ST Engineering), our full-year estimate is also lower than the street’s and, implicitly, we expect 4Q18 net profit of S$149m vs street expectations of S$169m. The variation is mainly due to our expectation that ST Engineering could report a S$22m disposal loss from the sale of Leeboy India (LBI). We believe that much of consensus estimates have not factored that in. Excluding that, our numbers are in line with street expectations. We also expect ST Engineering’s top-line growth to show a marked improvement due to guidance on higher orderbook recognition in 4Q18.

SIA: Likely to post uninspiring results on the back of higher fuel costs and lower pax yields.

• Our estimated 21% y-o-y contraction in 3QFY19 net profit is based on pre-SFRS 1 adjustment for 3QFY18. Singapore Airlines is likely to revise upwards its 3QFY18 net profit by about S$100m to factor in lower D&A and hence the y-o-y decline in 3QFY19 earnings could be significantly higher.
• Key factors that are expected to contribute to lower earnings are a 16% y-o-y rise in jet fuel costs, lower fuel hedging gains as well as likely weak earnings from SilkAir and Scoot.
• We also expect the parent airline’s pax yield to decline 0.8% y-o-y in 3QFY18 but RASK to rise by 1.4% y-o-y. A 1% y-o-y change in pax yield from our base assumption is expected to lead to a 9.8% y-o-y change in net profit.

SATS: 3QFY19 net profit likely to be flat yoy.

• Gateway services revenue growth and profitability were key drivers to SATS LTD. (SGX:S58)'s operating profit in 2QFY19. However, revenue growth for the segment could be affected by a decline in cargo handled, as Changi Airport’s air cargo volume in tonnage fell 0.9% y-o-y during the quarter.
• Still, after factoring in stronger contribution from TFK, higher food solutions revenue from China and the cruise business along with q-o-q improvement in associate earnings, we expect headline net profit to be flat y-o-y but underlying net profit to rise by mid-single-digits (3QFY18 included earn-out gains of S$4.5m).

SIA Engineering: Operating earnings likely to remain weak but net profit could show yoy growth underpinned by engine associates and JVs.

• We expect net profit of SIA ENGINEERING CO LTD (SGX:S59) for 2HFY19 to rise 5.7% y-o-y. If the pace of revenue decline slows substantially and margins remain stable, these could be catalysts for re-rating, especially if improving line maintenance revenue is a key contributor.

ESSENTIALS

Stay invested in ST Engineering; key datapoints to watch out for are:

1. orderbook size;
2. forward contract liabilities;
3. potential sequential improvement in the shipbuilding/ship repair revenue and PBT;
4. potentially lower losses at “others” segment. (In 3Q18, losses at VT Miltope dragged group PBT); and
5. progress in government approvals on the purchase of US nacelle manufacturer, MRAS.

Remain neutral on Singapore Airlines; key datapoints to watch out for are:

1. extent of aircraft disposals, sale and lease-back of aircraft and new debt to fund capex;
2. change in pax yield or RASK for all carrier groups;
3. Singapore Airlines’ guidance on operational problems due to the Rolls Royce Trend engines on Singapore Airlines’ and Scoot’s Dreamliners. (Air New Zealand which also operates the Dreamliners has warned of a NZ$35m-40m impact on second-half earnings). We are not too optimistic of a recovery in pax yields amid early signs of an economic contraction; and
4. Singapore Airlines’s guidance on air cargo and yields.

We remain buyers on SATS; key datapoints to watch out for are:

1. extent of weakness in gateway services revenue and its impact on operating margins; and
2. associate earnings growth, especially given that a weak rupiah led to lower growth in the last quarter. Even so, we believe SATS is sufficiently diversified to weather a slowdown in cargo throughput.

• We are also encouraged by SATS’ recent investments to build a new central kitchen in Tianjin, and ground handling and catering centres at Daxing in Beijing. We also expect SATS to raise its final dividend payout to S$0.13/share from S$0.12.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-01-31

SGX Stock Analyst Report HOLD MAINTAIN HOLD 10.200 SAME 10.200

BUY MAINTAIN BUY 4.060 SAME 4.060

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BUY UPGRADE HOLD 2.700 SAME 2.700