Singapore Aviation 1QFY20 Results Preview - UOB Kay Hian 2019-07-26: SIA & SIAEC To Show Flat Y-o-y Earnings; STE Could Deliver > 13% Y-o-y Growth

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

Singapore Aviation 1QFY20 Results Preview - SIA & SIAEC To Show Flat Y-o-y Earnings; STE Could Deliver > 13% Y-o-y Growth

• We expect Singapore Airlines (SGX:C6L) to report a 5% y-o-y decline in 1QFY20 net profit based on pre-SFRS 16 estimates as the incremental pax revenue is expected to be offset by weaker cargo earnings.
• We expect ST Engineering (SGX:S63) to report > 13% y-o-y net profit growth due to partial contribution from MRAS and higher orderbook recognition.
• We expect SIA Engineering (SGX:S59) to report flat y-o-y earnings, mainly due to a low base. We expect top-line to remain weak due to the grounding of B737 Max aircraft and potential loss from Jet Airways.
• Maintain MARKET WEIGHT.

WHAT’S NEW

We expect Singapore Airlines to report low-single-digit yoy decline in net profit for 1QFY20 on pre-SFRS16 numbers.

• However, the implementation of lease accounting could lead to net profit being 5% higher than our estimate. Excluding accounting anomalies, we expect the parent airline’s net profit to rise by mid-single-digit on strong pax traffic growth of 9.0%, higher pax load factor and marginal improvement in pax yield but offset by lower cargo load factor and cargo yields.
• We also expect lower losses from Scoot and higher profits from SilkAir due to a 3.1ppt y-o-y rise in load factor for the period. However, the grounding of B737 Max would likely impact profitability via higher D&A costs.
• What to look out for in Singapore Airlines’s 1QFY20 results on 31 July.
  1. The extent of decline in cargo yields and Singapore Airlines’s guidance as well potential freighter capacity cuts;
  2. potential compensation for the grounding of B737 Max; and
  3. improvement in RASK. We have estimated a 2.0% y-o-y rise in premium traffic.
• See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Corporate Actions; Singapore Airlines Announcements; Singapore Airlines Latest News.

ST Engineering (STE) could report > 13% net profit growth in 2Q19.

• We expect the following key earnings drivers:
  • the consolidation of MRAS, which could lead to S$3m-4m in profits;
  • lower finance costs following the redemption of an MTN;
  • higher orderbook revenue recognition for the quarter; and
  • lower losses from Miltope.
  These are expected to be offset slightly by higher D&A costs following the adoption of lease accounting.
• We also expect marine PBT to rise y-o-y, underpinned by improved profitability in the shipbuilding segment. We expect ST Engineering (SGX:S63) to maintain its 5 S cents interim dividend.
• What to look for in ST Engineering’s 2Q19 results.
  1. Impact from MRAS acquisition and extent of organic earnings growth;
  2. size of stock obsolescence charges;
  3. extent of improvement in marine profitability and outlook; and
  4. orderbook growth post incorporation of MRAS.
• We would also await ST Engineering’s guidance on a specific timeline for the completion of the Newtec acquisition as ST Engineering had previously guided that it will be completed in 2H19.
• See ST Engineering Share Price; ST Engineering Target Price; ST Engineering Analyst Reports; ST Engineering Dividend History; ST Engineering Announcements; ST Engineering Latest News.

SIA Engineering (SIAEC) is likely to turn in flat earnings.

• Top-line growth is likely to be weak due to lower line maintenance income from the grounding of SilkAir’s B737 Max aircraft and Jet Airways aircraft. If staff cost can be correspondingly lowered, operating earnings could be flat or even marginally higher as 1QFY19 staff cost was exceptionally high.
• Share of profits from JVs & associate could be flat as it was high in 1QFY19. SIA Engineering could recognise forex gains from a stronger US dollar.
• On balance, we expect SIA Engineering to register 0-5% y-o-y net profit growth.
• See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.

ESSENTIALS

Remain neutral on Singapore Airlines and SIA Engineering.

• Rumours of M&A notwithstanding, we believe earnings outlook is not rosy, given high labour cost, competition from regional maintenance centres and low maintenance requirement for newer aircraft. For Singapore Airlines, it remains to be seen to what extent the improvement in pax traffic and load factor can compensate for lower cargo traffic and very likely lower yields.

ST Engineering has risen 23.2% ytd, excluding dividend; our target price of S$4.70 remains the highest in the street.

• If ST Engineering reports single-digit earnings growth or lowers dividend payout, we believe investors will be disappointed. For now, we maintain our target price but suggest that investors accumulate on price weakness.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-26

SGX Stock Analyst Report BUY MAINTAIN BUY 4.700 SAME 4.700

HOLD MAINTAIN HOLD 2.550 SAME 2.550

HOLD MAINTAIN HOLD 9.500 SAME 9.500