SINGAPORE AIRLINES LTD (SGX:C6L)
SATS LTD. (SGX:S58)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
SIA ENGINEERING CO LTD (SGX:S59)
Singapore Aviation Sector - Focus On ST Engineering For Dividend Yield; Raise Target Price For SATS To S$3.40
- We remain neutral on the Singapore aviation sector. While newsflow on the opening up of borders and the distribution of a vaccine are gaining momentum, we believe the street might have underestimated the logistical challenges involved in distributing vaccines.
- ST Engineering remains our top pick, as it is the only company likely to offer a dividend yield.
- We also favour SATS, mainly as a play on the distribution of vaccines.
- As for Singapore Airlines, we have factored in the issuance of a further S$6.2b in MCB and have thus lowered our target price to S$3.53.
Singapore gradually opening borders but visitors still need to be COVID-19 tested.
- Visitors from Vietnam and Australia (excluding Victoria State) will be allowed into Singapore from 8 October under a special Air Travel Pass and if tested negative for COVID-19, they will not be required to be quarantined. 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.
- To date, the special Air Travel Pass is eligible to two other countries, Brunei and New Zealand. We do not expect any material improvement in traffic or flights as a result of this. At best, it could facilitate business travels to Singapore but outbound travel to these countries is still restricted.
Rapid roll-out of COVID-19 test kits could open up borders ahead of delivery of vaccines.
- Aviation agencies, International Air Transport Association (IATA) and the International Civil Aviation Organization have called for COVID-19 tests to be performed prior to departure in an attempt to open up borders. The IATA has also indicated that 88% of respondents indicated that they are willing to undergo testing as part of the travel process.
- Singapore plans to roll-out a new testing facility at Changi Airport, which along with an existing facility, could test more than 40,000 travelers daily or about 21% of pre-COVID-19 pax throughput at Changi Airport. Outside of Singapore, Japan has developed a test kit, which gives accurate test results in 30 minutes.
Another round of airline bailouts loom as world awaits COVID-19 vaccine.
- 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, we had already opined that Singapore Airlines is likely to exhaust its S$8.8b 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. We now assume that Singapore Airlines will issue S$6.2b in MCB by end-Mar 21. This would be dilutive to equity holders.
Singapore Airlines (SGX:C6L) - Just too many unknowns at this juncture to be positive.
- Will Singapore Airlines (SGX:C6L) resume passenger flights or focus on carrying cargo in 2021? Even if rapid testing is effectively rolled out, travelers could still be reluctant to travel for fear of contracting COVID-19 and related medical costs which are unlikely to be covered by travel or medical insurance.
- Similarly, even if COVID-19 vaccines are approved, the distribution of a vaccine could take more than a year, due to logistics and supply chain constraints. Several vaccines under development require to be maintained in sub-zero temperatures. Amid such uncertainties, we have assumed that Singapore Airlines will issue another S$6.2b in MCB by end-Mar 21 to shore up liquidity.
- Singapore Airlines’s book value per share in FY22, post additional MCB issuance and a forecasted loss of S$758m, is estimated at S$4.40. We value Singapore Airlines at 0.8x FY22F book value, factoring in annual dilution from the MCB.
ST Engineering (SGX:S63) - Ramping up PTF conversions but unlikely to offset decline in base maintenance.
- According to Flight Global, ST Engineering (SGX:S63) is raising its passenger to freighter (PTF) capability for A321 aircraft from 9/year to 25/year by 2023. ST Engineering also indicated that it is adding a new line for B767 conversion, which we estimate could theoretically double PTF conversion for the aircraft type. Even so, we do not expect such conversion works to offset the decline in engine and airframe repairs in 2020 or 2021.
- 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 2H20 could see a decline larger than the 17% y-o-y (ex-M&A) decline in 1H20.
- On the positive side, ST Engineering has bought back 7.6m shares to date and this raises the odds that ST Engineering will defend the 10 S cents final dividend for 2020 (our fair value price dividend yield is 4.17%). See ST Engineering Dividend History.
SATS (SGX:S58) - We have already assumed blue-skies scenario where flights almost double in FY22.
- SATS (SGX:S58) is highly levered to Singapore Airlines’s fortune with 45% of revenue accrued from the carrier prior to COVID-19. Aside from a recovery in Singapore Airlines’s flights, SATS could benefit from an increase in cargo volumes and potentially higher ASP arising from the handling and storage of vaccines.
- Outside of Singapore, SATS associates in Bangalore and Beijing have similarly benefitted via their cold chain facilities. Next, a reduction in losses from associates would be vital for an earnings recovery as ASEAN and Greater China associates - including consolidated Nanjing Weizhou - contributed 68% of losses in 1QFY21. At this stage, we are unsure of the ability of associates to lower wage costs due to stricter labour laws.
SIA Engineering (SGX:S59) - Clearer beneficiary of formation of travel bubbles and border openings.
- SIA Engineering (SGX:S59) derives the bulk of its earnings and cash flow from line maintenance checks, which is directly proportional to flight arrivals at Changi. As at Jul-Aug 20 flight movement at Changi has declined by 83% y-o-y but we have assumed that flights out of Changi would rise 93% y-o-y in FY22 and we expect SIA Engineering to be in the black for the period.
Recommendation on Singapore Aviation Stocks
- Singapore Airlines (SGX:C6L) - Maintain HOLD but lower our target price to S$3.53 from S$3.64 as we have factored in dilution from the issuance of a further S$6.2b in MCB. We have also shifted our valuation to FY22 but continue to value Singapore Airlines at 0.8x P/B. Suggested entry level is S$3.30-3.40.
- SATS (SGX:S58) - Maintain HOLD with a higher target price of S$3.40 vs S$3.10 previously. We move our valuation methodology from EV/Invested Capital to Price/OCF. We value SATS at -1SD to the 5-year mean or 15.5x FY22-23F average OCF. Suggested entry level is S$3.00.
- ST Engineering (SGX:S63) - Maintain HOLD and a target price of S$3.60. Suggested entry level is S$3.40.
- SIA Engineering (SGX:S59) - Upgrade from SELL to HOLD. We had previously valued SIA Engineering on a DDM basis, but now value the firm on net present value (NPV) on recurring FCF. We raise our fair value from S$1.57 to S$1.89. Suggested entry price is S$1.65.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2020-10-08
SGX Stock
Analyst Report
3.53
DOWN
3.640
3.40
UP
3.100
3.600
SAME
3.600
1.89
UP
1.570
