Analysts are mixed on SIA Engineering Company (SIAEC) after the company released its figures for the FY2022 ended March on May 5.
DBS Group Research analysts Suvro Sarkar and Jason Sum have downgraded their recommendation to “hold” from “buy” as they see SIAEC’s core profitability being “still some way away”.
“While flight traffic at Singapore Changi Airport, the main base for SIAEC’s line maintenance operations, continues to improve, it is still only at [around] 40% of pre-pandemic levels and thus, core earnings turnaround is at least a couple of quarters away,” the analysts write in their May 9 report.
“Excluding one-offs, SIAEC remains in core net loss position in FY2022,” they add, even though the company’s results remained largely within expectations.
Furthermore, the re-rating of SIAEC’s share price on the back of the relaxing of border measures, has “factored in [the] reopening story”.
“The gradual relaxation of border controls in Singapore has boosted sentiment for the stock in recent months, with share price up close to 20% year-to-date (y-t-d), outperforming the broad index and other aviation counters like Singapore Airlines (SIA), SATS and Singapore Technologies Engineering (ST Engineering),” the analysts say.
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The absence of a domestic aviation market and the delays in the full opening of international borders will also continue to constrain the company’s recovery, they add.
During the FY2022, no dividends were declared, removing a key support in the re-rating of SIAEC’s share price.
“Hence we believe a pause in momentum is likely at this stage,” say Sarkar and Sum.
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Despite the downgrade, the analysts remain positive on SIAEC’s prospects in the medium-term. The acquisition of a 75% stake in SR Technics Malaysia will broaden the range of its component repair capabilities, while the potential lease of two hangars in Subang, Malaysia, will see the expansion of SIAEC’s regional base maintenance network.
“Privatisation is one key catalyst”, say the analysts, who have kept their target price of $2.65. The unchanged target price includes a 20% privatisation premium, they say.
The faster-than-expected restoration of international flights can also help the stock to re-rate, they add.
CGS-CIMB keeps ‘buy’
Meanwhile, analysts from CGS-CIMB Research and UOB Kay Hian are more upbeat on SIAEC’s prospects.
CGS-CIMB analysts Kenneth Tan and Lim Siew Khee are keeping their “add” call with an unchanged target price of $2.92 on SIAEC.
While SIAEC’s net profit of $43 million for the 2HFY2022 stood below expectations due to higher staff costs, Tan and Lim still see the company’s recovery being on track.
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The flights handled by the company in Changi Airport grew to 27,000, up 65% y-o-y and 31% h-o-h in the 2HFY2022, in line with the rise in flight activity.
“The group also saw improvements in both light checks (186 checks, +15% h-o-h) and heavy checks (47 checks, +2% h-o-h) conducted in Singapore,” the analysts note in their May 6 report. “With Singapore easing its border measures, management is confident of a stronger recovery in FY2023”.
In the FY2023, the analysts expect SIAEC to see a 43% y-o-y increase in staff costs on the back of the tapering government wage support, wage inflation, as well as higher headcount.
On this, Tan and Lim have lowered their earnings per share (EPS) estimates for SIAEC by 7% for the FY2023.
To this end, they have projected an operating loss of $4 million for the FY2023 before a return to ebit profitability in the 2HFY2023.
That said, they are expecting SIAEC’s airframe overhaul and line maintenance revenue to recover to 75%/90%/100% of pre-Covid-19 levels (FY2018-2020 average) in FY2023/FY2024/FY2025. They have also upped their FY2024 EPS estimates by 17%.
To Tan and Lim, SIAEC is still trading at an attractive valuation at 1.8x calendar year 2022 P/BV (1 standard deviation below its 10-year mean) despite the run-up in share price.
SIAEC top sector pick for UOB Kay Hian; SIAEC to resume paying dividends in FY2023
UOB Kay Hian analyst Roy Chen is also keeping his “buy” call on SIAEC with an unchanged target price of $2.90.
To him, SIAEC’s FY2022 revenue and headline net profit of $566 million and $68 million stood in line with his full-year forecasts.
As at end-FY2022, the company also had a “considerable” net cash position of $623 million, equivalent to 21% of its market cap, a point noted by UOB Kay Hian’s Chen and CGS-CIMB’s Tan and Lim.
The lack of dividends declared for the year was also “expected” by Chen as the company was still receiving a “substantial” wage support by the government.
In his report, Chen sees an “accelerated recovery” ahead for the company, beginning from April onwards.
“Statistics of flight activities at Changi Airport and operating data of Singapore Airlines had picked up remarkably in March. Coming into April and May, the recovery momentum can only be stronger with the tailwinds from Singapore border relaxations (since April) and a number of public holidays and long weekends in May,” he writes.
“April aviation data from various public sources support our case of an accelerated recovery. According to SIA Engineering’s inhouse statistics, its line maintenance business volume had recovered to 45% of the pre-pandemic level in April, compared to 38% in March and FY22 full-year average of 29%,” he adds.
As such, Chen is expecting SIAEC to post positive core earnings in the 1QFY2023 in view of the faster recovery in the coming quarter. This is given that the company’s core earnings were only “a tad negative” in the 4QFY2022.
In addition, the analyst is expecting FY2023 to be the year that SIAEC resumes dividend payment.
“The government wage support, which had already been reduced to a very subdued level in 4QFY22, is slated to end in July 2023,” Chen writes.
On SIAEC’s intention to add to its headcount on the back of a faster recovery, Chen says the move would not “change our base case of an overall strong recovery in FY2023” even if it might create some “short-term mismatch” between revenue recovery and cost build-up.
On this, Chen has trimmed his net profit forecast for the FY2023 by $10 million to reflect the manpower ramp-up.
“Our new FY2023 net profit forecast of $92 million is still $24 million or 35% higher than FY2022 reported net profit of $68 million as we expect the business recovery to more than offset the reduction in government support. Our FY2024-FY2025 forecasts remain intact,” he says.
“SIAEC remains our top sector pick. It is currently trading at 15.7x FY2025 (normalised year) P/E (only 12.3x if ex-net-cash) which is at 2.0 standard deviation below its FY2014-2019 (pre-Covid-19 years) average P/E of 23.2x,” he adds.
“The 15.7x PE or 12.3x ex-net-cash PE are undemanding in our view, considering SIA Engineering’s strategic position, especially its line maintenance business’ market leadership (78% market share) in the international air hub Singapore.”
Shares in SIAEC closed 6 cents lower or 2.3% down at $2.55 on May 9.
