UOB Kay Hian has maintained a “neutral” outlook on the Singapore aviation sector even as the newsflow on the opening up of borders and the distribution of a vaccine are gaining momentum. 

Analyst K Aijth is of the opinion that “the street might have underestimated the logistical challenges involved in distributing vaccines.” 

As such, Singapore Technologies Engineering (ST Engineering) remains his top pick, as it is the only company likely to offer a dividend yield. He also favours SATS, mainly as “a play on the distribution of vaccines.’

ST Engineering is currently ramping up passenger-to-freighter (PTF) conversions, but Aijth said this is unlikely to offset a decline in base maintenance. According to Flight Global, ST Engineering is raising its PTF capability for A321 aircraft from 9 per year to 25 per year by 2023. 

See also: Gloomy outlook for aviation sector, but vaccines could benefit SATS and ST Engineering: UOB Kay Hian

ST Engineering also indicated that it is adding a new line for B767 conversion, which he estimates could theoretically double PTF conversion for the aircraft type. 

Even so, he does not expect such conversion works to offset the decline in engine and airframe repairs in 2020 or 2021. 

This is as American Airlines and United Airlines have already commenced furloughing employees, and this is likely to lead to further capacity cuts, which in turn will lead to lower aircraft maintenance revenue. 

Thus, aerospace divisions in 2H2020 could see a decline larger than the 17% y-o-y (ex-M&A) decline in 1H2020. 

However, ST Engineering has bought back 7.6 million shares to date and this raises the odds that the group will defend the 10 cents final dividend for 2020.

SIA to require more cash even if Singapore reopens

Aijth even though Singapore is gradually opening its borders with the Special Air Travel Pass, he does not expect any material improvement in traffic or flights. 

The Travel Pass states that visitors from certain countries will be allowed into Singapore and they will not be required to be quarantined, if tested negative for Covid-19,

Aijth said for visitors, this would not be without risks as the test results would take 48 hours and if tested positive, they will have to bear the costs related to tests and isolation. “At best, it could facilitate business travels to Singapore but outbound travel to these countries is still restricted.” he notes.

Furthermore, he also expects another round of airline bailouts as the world awaits COVID-19 vaccine. 

See also: DBS Research bets Covid-19 recovery hopes on Covid-19 vaccine in 2021

He pointed out that in the US, airlines are seeking an extension of Coronavirus Aid, Relief and Economic Security (CARES) Act funding, without which further furloughs and capacity cuts are being tabled. 

In Singapore, the brokerage had previously opined that SIA is likely to exhaust its $8.8 billion in rights and mandatory convertible bonds (MCB) proceeds by end-FY21. 

This would be due to substantial working capital funding requirements as well as a dismal outlook for the winter schedule, which will commence in the third week of October. He said he will assume that SIA will issue another $6.2 billion in MCB by end-Mar 21, and this would be “dilutive” to equity holders.

This, in turn, will also affect the fortunes of SIA Engineering (SIACE), which derives the bulk of its earnings and cash flow from line maintenance checks, which is directly proportional to flight arrivals at Changi. 

As at July-August 2020, flight movement at Changi has declined by 83% y-o-y, but he assumes that flights out of Changi would recover in FY22, and as such, expects SIAEC to be in the black for the period.

Aijth maintains his “hold” rating for ST Engineering with a target price of $3.60. SIA and SATS also maintained their “hold” ratings, but with a lowered target price for SIA ($3.53 from $3.64) and a higher target price for SATS ($3.40 from $3.10).

See also: 'Buy' SATS now as air travel could recover faster than expected: DBS

He also upgraded SIAEC from “sell” to “hold” after valuing the firm on net present value (NPV) on recurring Free Cash Flow (FCF). Target price has been raised from $1.57 to $1.89. 

As at 1.50pm, shares in ST Engineering, SATS, and SIA Engineering Company are trading at $3.63, $3.10 and $1.75 respectively, while SIA shares traded at $3.54