Broker's take: DBS upgrades ST Engineering, SIAEC on wage support boost

THE extended Jobs Support Scheme (JSS) will deliver a shot in the arm to the aerospace maintenance, repair and operations (MRO) sector, DBS Group Research said on Tuesday.

Analyst Suvro Sarkar thus upgraded both SIA Engineering Company (SIAEC) and Singapore Technologies Engineering (ST Engineering) to "buy".

He also upped SIAEC's target price to S$2.40, on better near-term earnings potential and more secure dividend prospects.

Shares of SIAEC, which provides aviation maintenance, repair and overhaul services, gained S$0.04 or 2.2 per cent to trade at S$1.90 as at 1.46pm on Tuesday.

For ST Engineering, the more diversified play, Mr Sarkar increased the target price to S$3.80, as the company's earnings trajectory for FY20/21 "now looks creditably close to flattish" despite the novel coronavirus pandemic.

Shares of the integrated engineering group, which provides solutions and services in aerospace, electronics, land systems and marine sectors, were trading at S$3.46 as at 1.46pm on Tuesday, up S$0.07 or 2.1 per cent.

On Monday, the Singapore government extended the JSS for another seven months to cover September 2020 till March 2021.

But the level of support will be reduced to 50 per cent of qualifying wages, from 75 per cent currently, for firms in the aerospace, aviation and tourism sectors. These include SIAEC and ST Engineering's aerospace division.

DBS's Mr Sarkar said the scheme's extension will offset some pain for MRO providers as the global MRO industry is set to shrink by almost half this year and will likely recover to pre-Covid-19 levels only in 2022 or 2023.

"Without the JSS grants, companies like SIAEC would have been in the red in the current financial year. Thus, the extension of JSS comes as a relief for the sector and will benefit overall earnings in 2020 and 2021," he wrote.

Factoring in the additional wage support, SIAEC should accrue S$60 million more in grant income in FY21, in addition to DBS's earlier estimate of S$125 million, Mr Sarkar said.

This will boost SIAEC's FY21 earnings by 61 per cent, although its FY22 earnings "will not be affected that much", he added.

As for ST Engineering, DBS estimates that about S$110 million of additional JSS-related grants will be available in FY20/21, on top of the research team's previous estimate of S$300 million.

DBs thus bumped up its earnings estimates for ST Engineering by 12 per cent for FY20 and by 9 per cent for FY21.

Mr Sarkar said the upward revision to the earnings estimates was less steep for ST Engineering because SIAEC's earnings are more leveraged to this grant income.