Brokers' take

SIA Engineering | Hold Target price: S$2.64 Nov 26 close: S$2.53 OCBC Investment Research, Nov 26

The share price of SIA Engineering Company (SIAEC) has corrected by about 15 per cent since our downgrade on Nov 9 post Q2 FY2019 results, based on the last close on Nov 23. A reduction in work volume and keen competition has weighed on results, and this may continue in the meantime, pressuring operating margins and hence possibly dividends in the future. There were fewer "C" checks maintenance in the Singapore base in 1H FY2019, though the number of "A" checks (lighter than "C") was higher. The number of checks that can be undertaken is also constrained by hangar capacity, and should an aircraft spend a longer time parked in the hangar, it would also mean missed opportunities to undertake maintenance work for other aircraft. We see few catalysts for the stock, except for 1) less pricing pressure from airlines under a lower oil price environment, or 2) a possible privatisation by SIA.

With the dim outlook, we fine-tune our estimates as well as terminal growth assumption from one per cent to 0.5 per cent such that our fair value estimate slips to S$2.64. Over the longer term, the competition from rivals such as Chinese maintenance, repair and overhaul providers may remain unabated, though SIAEC is still relatively well-positioned with its strategic partnerships.