Singapore’s aviation sector still has dark clouds looming over it even into 2021, but the race for a Covid-19 vaccine may benefit some companies.

UOB Kay Hian analyst K Ajith upgraded the aviation sector to “market weight” on the sector. Ajith has also rated SATS and Singapore Technologies Engineering (ST Engineering) “hold” and with target prices of $3.10 and $3.60 respectively.

Suggested entry prices for SATS and STE are $2.75 and $3.30 respectively.

However, despite the race for a vaccine, Ajith says he is not “confident that borders will reopen by end 2020, and thus does not expect any improvement for Singapore Airlines (SIA) or SATS”. 

However, if a vaccine is developed by the end of 2020 or 1Q21, SATS will benefit directly via the provision of critical pharmaceutical logistics and the handling for the Asia-Pacific region. 

He noted that the newsflow has been generally positive on the development of vaccines, with China’s CNBG and SinoVac announcing plans to roll out three Covid-19 vaccines by end-2020 with a combined production volume of 600 million doses by 2020. 

Ajith said the general expectation is that a working vaccine would be available by early-2021, and mass vaccination to commence only by mid-2021, according to the World Health Organisation (WHO).
 
SATS could benefit from the provision of cold-chain cargo for vaccines in the region, as SATS’s [email protected] is ISO certified and is the world’s first centre of excellence for pharmaceutical handling. 

Given Singapore’s status as a key transhipment hub, SATS is likely to play a significant role in the transportation and storage of vaccines to the Asia-Pacific region. SATS’ Indonesian associate PT JAS is also certified to handle pharmaceutical products.

Furthermore, ST Engineering could benefit from an increase in return-to-service checks in anticipation of Covid-19 vaccine-led travel recovery. 

Ajith noted ST Engineering has aircraft maintenance hangars in China and the US, and pointed out that its hangars are in key hubs in Guangzhou and Shanghai, and flight movements out of China have recovered to 80% of pre- Covid levels as at August, due to a rapid recovery in domestic traffic. 

Still, ST Engineering’s biggest aerospace exposure is in the US, where about 50% of aircraft is still grounded. If more Americans opt to be vaccinated, then airlines would restore grounded aircraft to service.

STE will benefit from return-to-service checks for temporarily parked aircraft and more extensive flight worthiness check on airlines grounded for longer periods, although this is likely to take place in early-2021 at best.

It will also benefit from the recently announced enhanced Jobs Support Scheme, where wages for employees in the aviation and the marine sectors will have a subsidy of 50% and 30% respectively for seven more months.

However, Ajith warns that even if vaccine development gains momentum, borders are likely to remain closed, possibly even till 1Q21. The majority of Asian countries continue to impose 14-day quarantines on all visitor arrivals. 

Even if leisure travels were to be allowed (such as in Japan for specific countries), travellers face the prospects of a cumulative 28-day quarantine, which will likely discourage travel. 

As for SIA, Ajith said could potentially exhaust its $8.8 billion in rights and convertible debt proceeds by end-March 2021 unless it manages to defer a large part of the $2.0 billion in advance payments for flights. 

As of August, the carrier had utilised $4.4 billion of the proceeds with $2.9 billion used for
debt repayment and $1.1 billion for ticket refunds and settlement of fuel hedging contracts.

However, SIA had $5.5 billion in current trade-related liabilities (including $2 billion in advance bookings) and $1.6 billion in derivative liabilities as at end March. Even assuming the derivative liabilities diminish in value, he estimates SIA would have at least a further $6 billion in payables by end March 2021. 

As such, SIA has been rated “hold” with a target price of $3.64, while SIA Engineering has been rated “sell” with a target price of $1.57.

As at 2.37pm, shares of SIA and SIA Engineering were trading at $3.53 and $1.86 respectively, while shares of SATS and STE traded at $2.89 and $3.42 respectively.