Brokers' Call: SIA Engineering

SIA Engineering | Buy

May 17 close: $3.33

Target price: $3.92

Broker: DBS Group Research, May 17

SIA Engineering's forward price earnings (PE) and price to book (P/BV) ratios are below standard deviation levels, which we view as a buy-in opportunity.

There are some positive earnings drivers ahead - an upswing in the engine maintenance, repair and overhaul cycle is already under way, with workload boosted further by visits from the problematic Trent 1000 engines and cabin retrofitting work on Singapore Airlines' legacy A380s which is expected to come in at the end of the year.

In addition, the new GE facility (a joint venture between SIA and GE Aviation) which should be operational next year or in early 2020 has the potential to be a large contributor to JV/associate income and expansion of the line maintenance segment in Japan (with a view towards other countries as well) could help drive the top line.

We maintain our buy call with a higher target price of $3.92; together with a dividend yield of 4.0 per cent, this implies an all-in return of some 24 per cent.

The adverse effect on the heavy maintenance segment of longer check intervals and lower check content of newer generation aircraft should be mostly offset by a growing fleet size, especially in the Asia-Pacific. Also, while the fleet management business is facing headwinds, with the fleet having already shrunk from 193 aircraft at its peak to the current 89 (with 2H18 actually recording a half-on-half increase of five aircraft under management), the worst could be over for that segment.


Spackman Entertainment Group | Buy

May 16 close: 72 cents

Target price: 10 cents Broker: RHB Research, May 16

We maintain "buy", while we cut our target price to 10 cents from 20 cents to imply a FY18 price-to-earnings ratio of 14 times.

Spackman's disappointing Q1 2018 was mainly due to the absence of profits recognised from its blockbuster movie, Master, and the underperformance of Golden Slumber.

As a result of the latter, we slash our FY18 net profit forecast by 33 per cent. However, with yield-accretive acquisitions last year boosting the company's recurring income - while another potential hit, Sovereign Default, is set to hit the big screen in H2 2018 - we keep our positive outlook, premised on a future comeback.

We remain positive on Spackman's outlook - based on an anticipated recovery in its financial performance.

The key risk to our call is the volatility in profitability, as Spackman's performance depends on the audience's reception to its movies.

We expect management to continue adding more recurring complementary revenue streams in the future, in order to reduce its reliance on the more unpredictable movie-making business.


Best World International | Hold

May 16 close: $1.29

Fair value: $1.39 Broker: CGS-CIMB, May 15

Best World's first-quarter headline net profit of $5.6 million was at only 9.2 per cent of our and 8.9 per cent of Bloomberg consensus full-year estimates of $61 million and $63.4 million respectively.

Earnings were skewed by delayed recognition of some China takings, as Best World is still in the process of transitioning its China operations to a China wholesale business model.

Best World guides for better China prospects in H2 2018 and is cautiously optimistic about stable Taiwan revenue year-on-year.

Q1 revenue fell 30 per cent year on year to $25.4 million, largely due to the plunge in Chinese revenue to $6.8 million on the back of delayed revenue recognition with the conversion of its China operations to a wholesale business model. Its performance in the matured market of Taiwan was also weaker, with revenue falling to $12.1 million as sales growth tapered amid the lower retention rate of its direct selling membership base and reduction in price promotions for core products.

We reduce our FY18-19 net profit forecasts as we become more conservative on Best World's near-term prospects. We downgrade to "hold" with a lower target price of $1.39.

A version of this article appeared in the print edition of The Straits Times on May 21, 2018, with the headline 'Brokers' Call: SIA Engineering'. Print Edition | Subscribe