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Analysts split on SIA Engineering as reopening lags, potential M&A 'exciting'

Jovi Ho
Jovi Ho7/28/2021 12:27 PM GMT+08  • 3 min read
Analysts split on SIA Engineering as reopening lags, potential M&A 'exciting'
In March, SIA Engineering signed a memorandum of understanding to explore acquisition of SR Technics Malaysia.
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Analysts are split after SIA Engineering posted 35.5% y-o-y net profit growth in its 1QFY2022 business update, though this was buoyed by government grants like the Jobs Support Scheme.

To OCBC Investment Research analyst Chu Peng, the figures signal “a better quarter” for the aircraft maintenance company, as it offers an “undemanding” valuation amid a beleaguered air travel sector.

In a July 27 note, Chu is recommending “buy” on the company with an unchanged target price of $2.37.

For 1QFY2022 ended June 2021, revenue rose 5.7% y-o-y to $125.3 million, driven by a recovery in flight activities. PATMI grew 35.5% y-o-y to $14.5 million, thanks to Job Support Scheme (JSS). Stripping off the impact of JSS, SIA Engineering would have recorded a net loss of $24.1 million.

JSS support is expected to taper off in 2H2021, writes Chu, which could weigh on the earnings recovery trajectory.

Despite the resurgence of Covid-19 cases globally, Singapore is on track to fully vaccinate 80% of its population by September and aims for quarantine-free travel in September. “The government also plans for a gradual and selective opening of borders by end of 2021, which in turn will support the recovery of SIA Engineering,” says Chu.

We saw sequential improvement in 1QFY2022 with flights handled at Changi by line maintenance and number of flights checked at Singapore base growing 13% and 31% q-o-q respectively. Majority of the checks performed at Singapore base were from light checks, up 39% q-o-q, as compared to heavy checks, up 5% qq-o-q.

“In terms of recovery, we believe line maintenance should benefit first with increase in operating flights. Fleet management driven by flying hours, will come next. Base maintenance which requires the aircraft to be taken out of service for longer periods could take a longer time to see demand come back,” says Chu.

See: JSS keeps SIA Engineering in the sky with $14.5 mil 1Q21/22 net profit

Meanwhile, DBS Group Research analysts Suvro Sarkar and Jason Sum are more measured in their forecast, maintaining “hold” on the company with a raised target price of $2.05 from $1.80 previous, which represents a 1% downside.

Sarkar and Sum believe core earnings recovery will be a long-drawn affair. “Recovery in flight traffic remains slow and still 73% below pre-Covid-19 levels at Singapore Changi Airport, which is the main base for SIA Engineering’s line maintenance operations. The absence of a domestic aviation market in Singapore and delays in opening up of international borders will continue to constrain earnings recovery over the next few quarters, as will the tapering of Singapore government grants (wage subsidies).”

A potential M&A target on the table provides some excitement, write Sarkar and Sum. In March, SIA Engineering signed a memorandum of understanding to explore acquisition of SR Technics Malaysia, which, if completed, will ensure SIA Engineering has a foothold in the higher growth narrowbody aircraft component MRO space, as compared to its current widebody fleet expertise.

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Privatisation is the other key upside catalyst, and Sarkar and Sum say their target price factors in a 20% privatisation premium. Excluding the premium, fundamental target price would be $1.70. “Faster than expected vaccine rollouts and speedy restoration of international flights will also help the stock to re-rate.”

As at 12.12pm, shares in SIA Engineering are trading 2 cents lower, or 0.95% down, at $2.08.

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