Analysts from three brokerages have handed a “buy” call on SIA Engineering Company (SIAEC) amid the recovery in global travelling.
Among the brokerages, DBS Group Research and CGS-CIMB Research have raised their target prices. UOB Kay Hian, while it has kept its “buy” call, has cut its target price on the stock.
DBS has raised its target price from $2.65 to $2.80, with CGS-CIMB slightly lifted their target price to $2.44 from $2.42. UOB, on the other hand, has reduced its target price from $2.70 to 2.60.
Notably, DBS has upgraded SIAEC to a “buy”, with analysts Suvro Sarkar and Jason Lum explaining that since their last downgrade on the stock to “hold” in May this year, SIAEC’s share price has retreated, and they think that “core profitability” for the stock is “more imminent”.
Elaborating, the analysts note that SIAEC’s share price has fallen around 15% from May, underperforming the Straits Times Index’s (STI) drop of 10%.
“We believe this provides a more attractive entry point for investors to play the earnings recovery story for SIAEC, on the back of the recovery in international air traffic. In case China opens up, the recovery trends could be faster,” say the analysts.
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Furthermore, Lum and Sarkar says that despite Singapore reopening fully, flight traffic at Singapore Changi Airport is still at about 65% of pre-pandemic levels.
Changi Airport is SIAEC’s main base of operations, and they think that as this figure moves towards the 80% mark in 2HFY2023 ending March 2023, SIAEC should achieve a core earnings turnaround.
In addition, they note a significant improvement in their JV and associate income seen in 1HFY2023.
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As such, there should be more confidence in SIAEC’s earnings delivery in the coming quarters, which should act as a key catalyst for the stock. The analysts also say that with a net cash balance sheet, rising interest rates can only be positive for the company.
SIAEC has also acquired new facilities and capabilities in the medium term, Lum and Sarkar says, pointing at the acquisition of a 75% stake in SR Technics Malaysia.
This broadens the range of its component repair capabilities, and with the potential lease of two hangars in Subang, Malaysia, there will be expansion of its regional base maintenance network.
Most notably, they think that privatisation is one key catalyst for SIAEC, and the $2.80 target price factors in a 20% privatisation premium. Another catalyst is the faster than expected restoration of international flights, which can also help the stock to re-rate.
UOB and CGS-CIMB note higher costs
In his Nov 3 note, UOB’s Roy Chen also noted the recovery trajectory for SIAEC, but also pointed out that opex for the company rose 38% y-o-y.
This was due to a ramp-up of its workforce, reduction in government wage support, and higher material prices.
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As a result, SIA EC ended up with an operating loss of $10.8 million in 1HFY2023, though this was more than offset by strong profit contribution from JVs and associates at $41.4 million, which is 54.3% y-o-y.
He also describes the company’s balance sheet as “rock solid”, noting that as of end-2QFY2023, SIAEC has a net cash balance of $606 million, equivalent to about 24% of its market cap.
Meanwhile, CGS-CIMB analysts Kenneth Tan and Lim Siew Khee have noted that elevated staff costs are likely to persist, and its guidance remains “cautious”.
Staff costs in SIAEC rose further to $192 million, which were 24% higher h-o-h, and 51% up y-o-y in 1HFY2023.
They attribute the increase to rising headcount,and inflationary pressures, adding that management shared that the group increased its headcount in 1HFY2023 ahead of the expected recovery in flight volumes.
Management elaborated that line maintenance headcount is “already close to desired levels”, while a further headcount increase is expected for base maintenance and engine services. As such, the analysts raise their staff costs from FY2023 to FY2025 by a further 3-7% accordingly.
Re-rating catalysts for SIAEC include quicker improvement in labour shortages, and reopening of China, while some downside risks include recession risks and margin erosion from rising cost pressures.
As at 1.32pm, shares of SIAEC were trading at $2.21, with a FY2023 P/B ratio of 1.48 and dividend yield of 2.25%.
