Underperforming aviation counters trade at attractive levels: DBS

DESPITE the recent underperformance of Singapore’s aviation stocks, DBS Group Research remains upbeat on them and is confident that the sector will deliver strong earnings growth over the coming years.

Its top picks are ST Engineering and Singapore Airlines (SIA). Both have a “buy” rating and target prices of S$4.20 and S$6.80, respectively.

DBS believes that aviation stocks are currently trading at attractive levels with favourable risk-to-reward ratios. Excluding SIA, DBS believes the performance of aviation plays has fallen behind the broader market over the past six months mainly due to underwhelming earnings.

“We believe that this is unwarranted and suggest that investors should not be deterred by this quarter’s results, as the earnings outlook for the sector remains promising,” the research team noted in a report on Mar 10. It also sees buying opportunities for investors as valuations are more enticing following share price corrections in the past month.

The research team believes the street is “severely underestimating” SIA’s earnings potential. Moreover, the national carrier’s impressive earnings momentum seems to be sustainable for a while.

Meanwhile, ST Engineering and SIA Engineering appear well-positioned to see an inflection in earnings as maintenance, repair and operations demand picks up pace.

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Between the two, ST Engineering is DBS’ preferred choice as the group is expected to grow its earnings at a compound annual growth rate of 14 per cent over the next two years. The counter is also trading at 18.6 times its earnings, which DBS finds undemanding.

All three counters were trading in the red as at 11.36 am. ST Engineering was trading 0.6 per cent or S$0.02 lower at S$3.38, SIA was down 0.2 per cent or S$0.01 to S$5.73, while SIA Engineering dropped 0.9 per cent or S$0.02 to S$2.23.