Excerpts from DBS Research report

Analysts: Jason SUM, CFA, Tabitha FOO & Paul YONG

Flying under investors’ radars
• Aviation sector underperformed the market in the past month after mixed earnings performance

• Earnings outlook for the sector remains upbeat; earnings inflection imminent for STE (ST Engineering) and SIAEC (SIA Engineering Company)

• Time to go long as improving fundamentals yet to be reflected in share prices and valuations

STE and SIA (Singapore Airlines) are our top picks in the sector

SQ2.15SIA: Target price S$6.80

Upbeat on sector’s earnings prospects despite macroeconomic concerns. Our optimistic outlook on the aviation sector was reinforced by the latest earnings season, which saw a noticeable change in the tone of management commentary, and companies expressing more optimism on the recovery trajectory.

Singapore Airlines’ (SIA) impressive earnings momentum appears to be sustainable for a while, while ST Engineering (STE) and SIA Engineering (SIAEC) are well-positioned to see an inflection in earnings as MRO demand accelerates with airlines eager to clear the backlog of deferred maintenance and the normalisation of global flight activity.

Attractive entry points

We are confident that the sector will deliver strong earnings growth over the next few years. Current share price levels are attractive entry points with favourable risk-to-reward.”

Although investors may be wary of the sector due to its high sensitivity to changes in macroeconomic growth outlook amid tightening financial conditions, we remain constructive due to the nascent recovery in Asia Pacific and promising forward booking data.

With several tailwinds in play, we are confident that the sector will deliver strong earnings growth over the next few years.

Current share price levels are attractive entry points with favourable risk-to-reward.

SIA aside, the performance of Singapore aviation counters has fallen behind the broader market over the past six months primarily 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. Additionally, we see buying opportunities as valuations are now more enticing following the share price corrections in the past month.

STE is our preferred choice in the sector, with the group’s earnings expected to grow at a solid 14% CAGR over the next two years, and undemanding valuation at a forward P/E of 18.6x, which is at around the -1.2 standard deviation level.

Additionally, we also like SIA, as the airline’s valuation remains undemanding, and we believe that the street is still severely underestimating the airline’s earnings potential.

SIAEC should make a strong comeback to profitability from 1HFY24, but our optimism towards the stock is somewhat tempered due to its valuation compared to industry peers.

Full report here

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