Aviation – Singapore - UOB Kay Hian 2019-10-01: Upgrade SATS To HOLD; ST Engineering Remains Our Top Pick In The Sector

Aviation – Singapore - UOB Kay Hian Research| SGinvestors.io SATS LTD. (SGX:S58) SINGAPORE TECH ENGINEERING LTD (SGX:S63) SIA ENGINEERING CO LTD (SGX:S59) SINGAPORE AIRLINES LTD (SGX:C6L)

Aviation – Singapore - Upgrade SATS To HOLD; ST Engineering Remains Our Top Pick In The Sector




WHAT’S NEW


Upgrade SATS to HOLD from SELL.

  • SATS’ share price has underperformed the FSSTI post 1Q results, due to weak operating earnings and several one-offs. Post our downgrade to sell on 26 Jul 19, the stock has declined by 9.0%. On balance, we believe that 2QFY20’s and possibly 3QFY20’s earnings could be flat y-o-y, due to weak air cargo traffic across SATS’ operating regions. Also, persistent disruptions at Hong Kong International Airport in Aug 19 and the ongoing transfer of flight operations to Beijing’s Daxing Airport are likely to affect SATS’ associate/JV earnings from Asia Airfreight Terminal and Beijing Airport Inflight Kitchen.
  • Still, we believe these negatives have been factored in by the street. However, given its strong balance sheet and cash flow generation abilities, we are still optimistic of its mid-to long-term growth. We recommend accumulating the stock near $4.50-4.60, which would approximate a dividend yield of 4.3%.

Accretive acquisitions abroad could provide new growth drivers in the mid term.

  • SATS had outlined S$1b in capex expansion over the next 3 years with a focus on establishing central kitchens in India and China. We believe that any acquisition will be strategic and add to overall scale. SATS’ S$31.2m cash acquisition of a 50% equity stake in Nanjing Weizhou Airline Food Corp (NWAF), which was completed in Jul 19, is a case in point. The latter was acquired at 15.4x FY18 EBITDA.
  • From 2015-18, NWAF’s EBITDA reversed from a loss of Rmb0.37m to Rmb22.5m as revenue doubled. Aside from organic inflight catering growth, we believe that NWAF could expand into either institutional catering or providing ready-made food for fast service restaurants, as is the case for SATS’s Kunshan subsidiary.

Singapore Technologies (STE), a beneficiary of the renewed key defence pact between Singapore and the US.

  • The pact, which allows American forces to use Singapore’s air and naval bases, was renewed for another 15 years to 2035. While ST Engineering (SGX:S63) would disclose its nature of defence-related work, we reckon that the firm would be providing maintenance support for the US Naval and Air Force and as such, we deem the extension of the defence pact as positive for ST Engineering. In 2018, defence-related works accounted for 31% ($2.1b) of ST Engineering’s revenue.

STE is trading at 5-year mean PE valuation, downside risk is low.

  • The street does not appear to be too enthused by ST Engineering’s recent US$24.3m (S$33.5m) purchase of satellite communications (SATCOM) firm, Glowlink Communications Technology (Glowlink). We however believe that it complements ST Engineering’s existing SATCOM business as well as a prior acquisition, Newtec.
  • Meanwhile, ST Engineering is trading at 20x 2019F earnings, in line with the 5-year average. Given recent acquisitions and diversification, we reckon ST Engineering deserves to trade at a higher PE valuation.

Remain neutral on SIA and SIAEC.

  • For Singapore Airlines (SGX:C6L), the earnings outlook is likely to be clouded by weakness in the cargo business, potential demand destruction from Brexit and erosion of demand for business class travel.
  • For SIA Engineering (SGX:S59), competition from regional maintenance centres does not bode well for long-term growth prospects. Competition is likely to be compounded by Airbus’ plan to expand its hangar operations in Malaysia. The latter has a capacity to accommodate four single aisle and two wide-bodied aircraft. 2QFY20 earnings are also expected to be lacklustre as flight movement at Changi Airport fell by 1.6% y-o-y in August. This should lead to lower line maintenance earnings for SIA Engineering, which is the most lucrative operating segment.


ESSENTIALS

  • ST Engineering is our top pick in the Singapore aviation sector.
  • For SATS, we would ideally be buyers on dips near S$4.50-4.60.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-10-01
SGX Stock Analyst Report HOLD UPGRADE SELL 4.800 SAME 4.800
BUY MAINTAIN BUY 4.340 SAME 4.340
HOLD MAINTAIN HOLD 2.550 SAME 2.550
HOLD MAINTAIN HOLD 9.500 SAME 9.500



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