Sector weakness looms over aviation firms

Profits of SATS, SIA Engineering, and ST Engineering are expected to register declines.

As challenges lie overhead for Singapore’s aviation firms, upcoming results of SATS, SIA Engineering, and ST Engineering are expected to take a hit, according to UOB Kay Hian.

UOBKH expects SATS to report a 3% YoY decline in underlying earnings, but there is a possibility that headline net profit could be higher due to divestment gains.

“Whilst cargo traffic at Changi declined by 7.6% YoY, we expect gateway services revenue to rise by >10% due to the consolidation of Ground Team Red (GTR), excluding which we expect <2% revenue growth. Operating margin is expected to improve QoQ as slots left vacant by the grounding of Jet Airways have been taken by Vistara and other airlines,” said UOBKH analyst K Ajith.

SIA Engineering is expected to be hit by weak flight movement out of Changi Airport, which declined 1%. “2QFY2019 operating margin was already low to begin with, and if the current quarter’s operating margin matches 1QFY2020’s 6.9%, SIAEC could still show yoy operating profit growth. On balance, we expect lower opex to be key driver for any incremental profit growth,” Ajith said.

Profit declines of as much as 10-15% are expected for ST Engineering, no thanks to a $14.2m charge on an arbitration proceeding for a dispute involving a marine customer, which STE indicated that it will recognise in 3Q2019, and guidance for MRAS’ integration related costs.

“Core net profit is estimated to decline by low single digit, mainly due to integration costs. Key data to look out for would be the extent of the increase in group revenue, pace of amortisation of intangible and earnings contribution from the electronics segment,” Ajith added.

Across the sector, Singapore Airlines (SIA) could be the sole outlier and is likely to report a strong set of earnings, according to UOBKH.

Ajith commented, “Core net profit is expected to rise by about 25% YoY, underpinned by: a) an estimated 36% yoy rise in parent airline’s profitability, b) lower losses from SilkAir. Parent airline’s earnings are expected to be supported by 0.7ppt improvement in pax load factor and roughly 14% YoY decline in jet fuel prices. In 1QFY2020, the parent airline reported an operating profit of $256m on load factor of 82.2%. Pax load factor was 2.7ppt higher QoQ and fuel prices were also lower.”

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