SINGAPORE (Feb 2): UOB Kay Hian is keeping its “market weight” rating on the Singapore aviation sector and says it expects a “lacklustre quarter” when SIA and SATS report their 3Q17 results on Feb 7 and Feb 9, respectively.

In a Tuesday report, UOB lead analyst K Ajith says SIA is expected to post a 36% decline in net profit in 3Q on the back of lower passenger loads and yields.

UOB has a “hold” recommendation on SIA, with a target price of S$10.10.

“The extent of yield erosion amid declining load factors will be a key focus. If the decline in yields accelerates, it will indicate weakening competitive position,” Ajith says.

SIA is also unlikely to see a lift in subsidiaries’ profits, with further losses expected from its airline associates.

However, SIA Cargo could reverse out of the red in 3Q on the back of a 4.7-percentage-point increase in cargo load factor compared to the preceding quarter, as well as strong demand on North American routes.

“We estimate a S$19 million operating profit versus an S$11 million loss in 2QFY17,” says Ajith.

Meanwhile, SIA Engineering is expected to see operating profit continue to slide.

“While 3QFY17 could see a slight seasonal uplift with line maintenance profits improving q-o-q, it may not be sufficient to offset losses at the repair and overhaul segment, which was in the red in 1HFY17,” Ajith says.

UOB is keeping its “sell” recommendation on SIA Engineering, with a target price of S$3.30.

SATS, on the other hand, is expected to see a 2-4% y-o-y rise in 3Q net profit. This is on the back of a 4.8% y-o-y increase in passenger throughput numbers at Changi Airport during the quarter.

However, Ajith cautions that staff costs, which have risen for four consecutive problems, could pose a challenge for SATS.

“While SATS has indicated a shift towards increased automation and technology to reduce the reliance on labour, it remains to be seen to what extent staff costs could be managed,” says Ajith.

UOB has assumed a 1% y-o-y increase in staff costs for SATS in 3Q. “Every 1% increase from our base staff cost assumption should lower our 3QFY17 PBT (profit before tax) estimate by 3.5%,” Ajith adds.

UOB is putting its “hold” recommendation for SATS with a target price of S$4.50 under review, pending the release of its 3Q results next week.

As at 1.08pm, SIA is trading 10 Singapore cents lower at S$9.96; SIA Engineering is trading 2 Singapore cents lower at S$3.53; and SATS is trading 2 Singapore cents higher at S$5.28.