“We see SIE as a cheaper proxy for the border reopening theme as it is trading at -1.5 standard deviation from mean since 2011, relative to SIA’s one time FY2022 ending March P/BV (or +1 standard deviation above mean on adjusted FY2022 book value per share),” she writes in an April 8 research note.
Her higher target price of $2.85 from $1.78 previously is underpinned by a raised P/BV multiple up to 2 times, close to the average one-year trading band pre-Covid-19 to reflect borders reopening.
Lim believes that the roll-out of vaccines and the low number of community cases in Singapore, combined with pent-up demand for travel and prospective travel bubbles could see an “orderly opening” of Changi Airport by September. She notes that the government plans to increase international air routes from Changi from the current 66 cities up to 80 cities in the coming months.
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While seat capacity may still be low, Lim points out that SIEC is more sheltered given that line maintenance work is performed based on the turnaround frequency of aircraft, regardless of the number of passengers.
To that end, she is forecasting SIEC to turn profitable in FY2022 on the back of better maintenance revenue as more flights through Changi resume, in addition to the strong cargo trend SIEC is already benefitting from.
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“SIE’s key line maintenance operations in Singapore, US, Japan and Hong Kong are likely to be the first to benefit from the resumption of more flights. We forecast line maintenance revenue to return to circa 60% of pre-Covid-19 levels by FY2022 and 85% by FY2023,” she says.
Lim points out that SIEC also has a strong net cash position of $500 million, making it well-positioned for earnings-accretive M&A to increase market share, as competitors could face steeper performance declines due to lack of government support.
In addition, she expects SIAEC to continue receiving government help until January 2022. “We expect circa $140m of subsidy from 4QFY2021 to 3QFY2022 which includes the extended 50% wage cost sharing for the aviation sector from April to September 2021,” she says.
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Long-term restructuring remains a catalyst for the counter in Lim’s view, in light of the slew of recent restructuring exercises. “We believe the possibility of take-over/pairing down of stake by SIA in SIEC could resurface,” she says. Lim is positive on such an exercise, noting that "that there is very little reason for SIEC to remain listed".
As at 3.52pm, shares in SIAEC are up 30 cents or 13.64% higher at $2.50.