SIA Engineering downgraded by Daiwa after setback in Philippine operations

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Daiwa downgraded SIA Engineering to Hold from Outperform as media reports indicate Tigerair Australia may end all maintenance work at its facility in the Philippines.

That was after serious faults to one of Tigerair Australia’s aircraft went undetected during the maintenance process and ended up requiring extensive repair work which left the plane sitting idle for three weeks, Daiwa noted, adding that since the carrier only has 15 aircraft, meant it had to cancel some services.

“We believe that the termination news by Tigerair Australia’s parent, Virgin Australia, will be a setback for SIAEC, which has already seen a gradual decline for its airframe maintenance/fleet management services, likely the result of heightened competition,” Daiwa said in a note on Monday.

While the engine maintenance business under SIA Engineering’s joint ventures has been a bright spot, it likely won’t be sufficient to offset headwinds in the core business following this negative newsflow, which could hurt the fast-growing Clark base operations, Daiwa said. It added that issues could be compounded by damage from Typhoon Mangkhut, which struck the Philippines over the weekend.

“We were previously more optimistic that a turnaround in its revenue could be expected in the second half of 2019, post the completion of its fourth hangar at Clark Freeport by September 2018 but this latest development might leave a negative impression on airlines who have always chosen the Singapore incumbents due to their superior service quality over cost, which will now be called into question, in our view,” Daiwa said.

It cut its 2019-2021 revenue forecasts by 3 percent amid lower growth estimates for the core airframe maintenance division after the set back. That led to 4 percent cuts to earnings per share forecasts for 2019 to 2021, it said.

It lowered its target for SIA Engineering to S$3.09 from S$3.56 on the lower earnings estimates and on higher capex assumptions as greater machinery spending may be needed to gain a competitive edge on productivity, it said.

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