SIA Engineering - CGS-CIMB Research 2021-04-08: Upgrade To ADD; Switch To This For Border Reopening


SIA Engineering - Switch To This For Border Reopening

  • The systematic vaccine roll-out plan, low in-community cases and pent-up demand for travel could see orderly opening of Changi airport by Sep 21.
  • The worst could be over for SIA Engineering as we forecast it to turn profitable in FY22 (April 2021 to Mar 2022) with line maintenance revenue at ~60% of pre-COVID-19 levels.
  • SIA Engineering (trades at -1.5 s.d. from mean) is an alternative to SIA (trades at mean valuations) on border reopening theme. Upgrade to ADD with target price at S$2.85.

Switch from Singapore Airlines to SIA Engineering for more palatable valuations at -1.5 s.d.

  • We think the risk-reward for SIA Engineering (SGX:S59) is improving with limited downside risks as more flights through Changi gradually resume with more bilateral travel bubbles established. SIA Engineering is already a beneficiary of strong cargo trend as it performs line maintenance for cargo aircraft. It is also backed by net cash of ~S$500m, ripe for earnings-accretive M&As to increase market share. Restructuring exercise could be a long-term possibility.
  • SIA Engineering is one of the few large-cap stocks (above US$1bn and net cash) in Singapore that are trading at between -1 and -2 s.d. of mean. We see SIA Engineering as a cheaper proxy for the border reopening theme as it is trading at -1.5 s.d. from mean since 2011, relative to Singapore Airlines (SIA, SGX:C6L)’s ~1x FY22F P/BV (or +1 s.d. above mean on adjusted FY22F BVPS).
  • Upgrade SIA Engineering from Hold to ADD and raise target price to S$2.85, based on 2x P/BV or the average 12-month trading band just before COVID-19.

SIA Engineering is more sheltered from passenger load capacity

  • Changi Airport is now connected to 66 cities around the world (160 cities pre-pandemic) and the Singapore government plans to expand this to ~80 cities in the coming months. Although seat capacity could still be low (e.g. (SIA at 75% of pre-COVID-19 levels), SIA Engineering is somewhat more sheltered as line maintenance work is performed based on the turnaround frequency of aircraft regardless of the number of passengers.
  • SIA Engineering’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 ~60% of pre-COVID-19 levels by FY22F and 85% by FY23F.

More active in corporate actions; muscling up for recovery

  • With a strong balance sheet, we think SIA Engineering could look for more M&As as competitors could face steeper performance declines (lack of government support).
  • In early-Mar 21, SIA Engineering announced its intention to acquire (in part or whole) component MRO and management services company, SR Technics Malaysia (SRTM). SRTM made RM7m and RM8m net profit in FY20 and FY19, respectively, with a share capital of RM81m.

Government help till Jan 2022

  • SIA Engineering has received ~S$148m of government subsidy mainly in the form of Job Support Scheme as of 9MFY21 (Apr 2020 to Dec 2020). We expect ~S$140m of subsidy from 4QFY21 to 3Q22F which includes the extended 50% wage cost sharing for the aviation sector from Apr-Sep 2021.
  • SIA Engineering is likely to recognise the extended amount from Aug 21 to Jan 22.

SIA Engineering is a cheaper proxy for border reopening; upside from mean reversion

LIM Siew Khee CGS-CIMB Research | 2021-04-08
SGX Stock Analyst Report ADD UPGRADE HOLD 2.85 UP 1.780