Aviation – Singapore - UOB Kay Hian 2019-05-10: Earnings Preview ~ SIA & SIAEC Likely To Disappoint; STE & SATS Likely To Deliver Organic Growth

SGinvestors.io

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

Aviation – Singapore Earnings Preview: SIA & SIAEC Likely To Disappoint; STE & SATS Likely To Deliver Organic Growth

• We expect SATS LTD. (SGX:S58)’ core net profit to rise by 20%, underpinned by growth from the non-aviation food segment, but expect SINGAPORE AIRLINES LTD (SIA, SGX:C6L) to report a 37% y-o-y decline on pre-SFRS 1 based numbers.
• For ST ENGINEERING LTD (SGX:S63), we expect low-to-mid single-digit earnings growth due to guidance on higher orderbook recognition in 2019, lower financing costs and a likely improvement in the marine sector’s margins.
• We are not optimistic of an earnings pick-up for SIA ENGINEERING CO LTD (SGX:S59) and expect the company to cut final dividends.
• Top picks are SATS and ST Engineering.

WHAT’S NEW

ST Engineering’s (STE) 1Q19 earnings likely to show low-to-mid single-digit improvement.

• We expect higher contribution from the marine division as two littoral vessels are to be delivered in the year. On the cost front, we expect lower interest cost, following the redemption of a US$500 MTN in 3Q18. There is also the possibility that losses at Miltope, which makes ruggarised key boards for the military, could narrow in the current quarter, given ST Engineering’s guidance of cost rationalisation.
• However, stock price drivers will be largely dependent on contract wins, including the US Postal services contract, which ST Engineering is bidding for together with US partner, Workhorse Group.

SATS’ headline net profit likely to show y-o-y decline but core net profit likely to rise by 20% y-o-y.

• We have lowered our full-year net profit estimate by 2%, factoring in slightly lower cargo traffic. In 1Q19, air cargo handled at Changi Airport fell 5.1% y-o-y and this should lower gateway services revenue.
• We expect SATS LTD. (SGX:S58) to report full-year net profit of S$260.4m, just S$1m higher than the street’s forecast. We also expect SATS to raise final dividend payout to 13 S cents from 12 S cents.
• Positive catalysts: Stronger food solutions revenue out of China, stable staff costs, improving associate earnings.

SIA likely to miss expectations. Consensus full-year estimates imply SIA likely to report S$272m in profits for 4QFY19.

• Barring a significant rise in pax yield or RASK, we believe that, SIA will be hard pressed to meet expectations. We have estimated a 1% y-o-y rise in pax yield and a corresponding 1.7% y-o-y rise in RASK for the period. In comparison, SIA’s yields were flat y-o-y but rose 2.4% in 3QFY19.
• A key uncertainty would be the extent of cargo profitability, given that load factors declined during the period. We also expect higher funding cost and lower profits from airline associates. We expect SIA to lower final dividend payout to 10 S cents from 30 S cents.

SIA Engineering’s (SIAEC) operating earnings likely to remain weak but extent of net profit decline highly dependent on engine associates and JVs.

• The street expects 4QFY19’s net profit to decline by 17% y-o-y, while we expect a 13% y-o-y decline. We have assumed that SIA Engineering will see greater engine maintenance works in 4QFY19, particular related to the Rolls Royce Trent engines.
• Unless, operating earnings improve, we do not expect the results to be a stock price catalyst. We also expect SIA Engineering to lower final dividend by 1 S cent to 8 S cents.

ESSENTIALS

• Stay invested in ST Engineering; key data points to watch out for:
  1. the size of orderbook,
  2. forward contract liabilities,
  3. potential sequential improvement in the shipbuilding/ship repair sector’s revenue and PBT, and
  4. potentially lower losses at the “others” segment (in 2H18, losses at VT Miltope dragged group PBT).

Remain neutral on SIA and SIAEC; even if SIA beats expectations, we see limited stock price catalysts.

• The grounding of the B737 Max and lack of parts on the Dreamliner Trent engines could impact operations and load factors in FY20. There has been a clear slowdown in cargo traffic since the start of the year and profitability is also likely to be impacted further if the trade war between China and the US escalates.
• The same goes for SIA Engineering. Revenue has been decreasing for five straight quarters and unless that reverses with improved operating margins, we do not expect the stock to outperform.

We remain buyers on SATS

• A key concern is the slowdown in cargo throughput, however, SATS is sufficiently diversified and we expect the food solutions business in China to benefit from the state’s reflation efforts.
• SATS is also on schedule to build a new central kitchen in Tianjin, ground handling and catering centres at Daxing in Beijing. SATS recently adopted pasteurisation and sterilisation technology could be utilised in these kitchens as it can increase shelf life, without refrigeration.
• We also expect SATS to raise its final dividend payout to S$0.13 from S$0.12.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-10

SGX Stock Analyst Report BUY MAINTAIN BUY 4.700 SAME 4.700

HOLD MAINTAIN HOLD 2.550 SAME 2.550

BUY MAINTAIN BUY 5.600 SAME 5.600

HOLD MAINTAIN HOLD 10.100 SAME 10.100