Brokers' take

Singapore Airlines | Hold Target price: S$10.40 Sept 18 close: S$9.50 UOB Kay Hian, Sept 18

We lower our fiscal 2019 net profit forecast by 12.3 per cent as we factor in an additional S$91 million in losses from 20 per cent-owned Virgin Australia (VAH), which declared an exceptional loss of S$632 million in FY18. SIA should recognise about S$137 million loss from VAH in Q2 FY19.

We also expect a weak second quarter next year due to a 42 per cent year-on-year increase in jet fuel costs. Barring a high-single-digit rise in pax yields and a reduction in non-fuel cost, SIA is likely to show a y-o-y decline in operating profit in Q2 FY18.

The 4.4 percentage point improvement in pax load factor in August for the parent airline was the highest for the year, and SIA attributed the strong improvement to "strong returning traffic from summer holidays".

Overall, there are few positive catalysts unless fuel prices start easing. We believe SIA could face cost pressures over the next two quarters from higher fuel prices and a likely increase in wage bill, given ongoing negotiations with pilots. Associate's performance is also likely to be lacklustre, given VAH's provisions.

We reduce our fair value from S$11.10 to S$10.40 as we lower SIA's fair value price-book ratio from 0.8 to 0.75 times. At current price of S$9.57, SIA is trading at 0.68 times FY19 book value. Entry price is S$9.10.

GSS Energy | Buy Target price: S$0.22 Sept 18 close: S$0.13 RHB Capital, Sept 18

GSS has entered into a JV agreement with GPCC Korea, a leading manufacturer of electric wheelers, to establish I-Motor Asia. This JV will be starting the distribution of its tuk-tuks and electric scooters under the iconic Isomoto line - which, in turn, is owned by the Lamborghini family through its partners in Thailand and Vietnam - by the end of 2018.

GSS will aid in the manufacturing and assembly of both the gasoline and electric models in the 125cc and 150cc categories, as well as the three-wheelers.

We remain optimistic on GSS's prospects and anticipate this new JV to contribute positively to group numbers in FY19, especially if the launches are successful. We also expect the pricing of these bikes to range between US$3,000 and US$5,000, which should lead to wider margins for GSS.

Until more details on production and sales volumes are shared over the next few months, we maintain our earnings estimates. With rising oil prices, especially over the last few months, GSS is expected to benefit directly. We believe the group is close to securing an offtaker for its gas, and think that the current weakness represents a good opportunity to accumulate the stock.

Downside risks to our call include an economic slowdown and issues in executing projects.

Compiled by Rachel Mui

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