Analysts from UOB Kay Hian Research and DBS Group Research have maintained their “buy” rating for SIA Engineering S59 with unchanged target prices of $2.67 and $2.80.
In their report dated May 10, UOB Kay Hian analyst Roy Chen says that SIA Engineering’s FY2023 net profit of $66.4 million, which came in slightly down y-o-y at 1.8% lower than FY2022, was broadly in line with his expectation, forming 102% of his FY2023 forecast. The group's FY2023 ended in March.
SIA Engineering’s operating performance also continued to improve as its operating losses narrowed to $3.0 million in 4QFY2023, compared to the $12.5 million in operating losses in 3QFY2023.
On a full-year basis, operating losses increased slightly to $26.3 million in FY2023 from $21.9 million in FY2022, as the recovery was not able to fully offset the reduction in government grants, says Chen.
However, excluding the impact of government grants, he notes that SIA Engineering’s operating performance improved significantly y-o-y by $55.6 million.
Meanwhile, the share of profits from SIA Engineering’s joint ventures (JVs) and associates declined 1.6% y-o-y to $77.8 million in FY2023.
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Chen notes that the performance of JVs and associates in FY2022 was boosted by a major one-off tax writeback and also helped by higher government wage support. Excluding the tax writeback and the government support, the profit contribution by JVs and associates achieved a significant improvement of $42.7 million y-o-y.
The analyst says that SIA Engineering’s recent renewal of service agreements with Singapore Airlines (SIA) and Scoot could help take off some margin pressure for the company. Commencing from April 1, these new agreements would supersede the previous agreements and are for a term of two years with an option to extend for another one year.
“Although SIA Engineering management declined to provide more details about the terms of the new contracts, we believe they should allow SIA Engineering to pass down at least some inflationary cost pressure to these major customers. The positive impacts on margins, if any, may be felt as early as next quarter,” says Chen.
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The analyst’s unchanged target price of $2.67 is based on a discounted cash flow model with a weighted average cost of capital (WACC) rate of 8.5% and a terminal growth rate of 2.5%.
Highlighting SIA Engineering’s “technological edge” owing to its SIA parentage are DBS analysts Suvro Sarkar and Jason Sum.
They say that close to 60% of SIA Engineering's top line is driven by its parent company, and thus the growth and maintenance cycle of SIA's fleet strongly impacts SIA Engineering’s core businesses.
“Given SIA's strategy to continuously refresh and maintain a young and technologically advanced fleet of airplanes, SIE is usually the first in the region to maintain new aircraft types and can win third party business in the new age aircraft segment,” they say.
As China reopens, the DBS analysts say that recovery trends for aviation in the region are projected to accelerate. Despite Singapore fully reopening, flight traffic at Singapore Changi Airport — the main base for SIA Engineering’s line maintenance operations — is still at some 80% of pre-pandemic levels.
“As this moves towards the 100% mark in the next 6-12 months, SIA Engineering should achieve a core earnings turnaround,” say Sarkar and Sum.
With significant improvement in JV and associate income already seen in FY2023, they add that there should be more confidence in SIA Engineering’s earnings delivery in the coming quarters, which should act as a key catalyst for the stock.
Downside risks, on the other hand, could stem from corporate inaction and the reopening in China and recovery of regional international flights both becoming slower-than-expected.
As at 4.50pm, shares in SIA Engineering were trading flat at $2.33.
