UOB Kay Hian Research analyst Roy Chen has re-initiated a “buy” recommendation on SIA Engineering with a target price of $2.80, while keeping a “market weight” rating on the overall Singapore aviation sector, as he sees the recovery of the sector as being “well on track”.
See: UOB Kay Hian expects Singapore aviation sector to recover by end-2024, sees SIAEC as top pick to ride on recovery
This is in lieu of increasing flight activities at Changi Airport with the recent relaxation of international restrictions, which Chen believes will outpace the expected passenger volume recovery.
With that, the group is strategically positioned in a faster lane of recovery compared to peers whose financial performances are more geared to the relatively laggard passenger volume growth.
According to Chen, SIA Engineering is set to be the first to regain positive core net profit within the local aviation scene (excluding government grants). “We are now projecting net profit to recover to $92 million in FY2023 ending March 2023, representing 57% of its pre-Covid-19 (FY2019) level,” says the analyst, especially in light of the consistent narrowing of core net losses over the past five quarters. If SIA Engineering keeps up the trajectory, it is expected to report core net profit in the next one to two quarters.
The group is also well positioned to resume dividend payment in as early as FY2023, according to Chen. This is considering its earnings recovery and strong balance sheet, displaying $679 million in net cash. “We do not rule out the possibility of a special payout by FY2024, given its major shareholder Singapore Airlines’ (SIA) cash needs for mandatory convertible bond (MCB) redemption,” Chen says.
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Moreover, SIA Engineering engine and components’ joint ventures are set for positive recovery, after also demonstrating resilience during the Covid-19 pandemic, working with airlines and engine original equipment manufacturers (OEMs) to bring forward service volume with the impending heightened demand with full recovery of the aviation industry.
This has been made possible with SIA Engineering’s strong business development foundation, especially with regard to strengthening relationships with global leading engine OEMs for the group to expand its existing engineering capabilities. A prime example would be its acquisition of Malaysia-based SR Technics Malaysia for SIA Engineering to optimise its maintenance, repair and operations (MRO) business.
Some risks the analyst notes include events that disrupt the sector’s recovery and increase competition for SIA Engineering’s MRO business.
As at 10.42am, shares in SIA Engineering are trading flat at $2.47 at an FY2022 P/B ratio of 1.6x on March 30.
