SIA Engineering - UOB Kay Hian 2022-03-28: Preferred Proxy To Ride Singapore Aviation Recovery

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SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Preferred Proxy To Ride Singapore Aviation Recovery

• An immediate beneficiary of airlines’ increasing flight activities at Changi Airport, SIA Engineering is likely the first to regain core profitability under our Singapore aviation coverage.
• We see a good chance for SIA Engineering's dividend to rebound to a meaningful level in as early as FY23, backed by its strong net cash (about 26% of market cap). There is also hope for a special dividend payout by FY24, given its parent SIA’s cash needs for MCB redemption.

An immediate beneficiary of increasing flight activities.

• SIA Engineering (SGX:S59)’s line maintenance service (about 50% of its pre-COVID-19 revenue) would immediately benefit from airlines’ increasing flight activities at Changi Airport, which we believe would outpace the expected passenger volume recovery. This puts SIA Engineering in a faster lane of recovery vs other aviation plays whose financial performances are more geared to the relatively lagged passenger volume growth.
• SIA Engineering’s engine & components JVs, which demonstrated good resilience during the pandemic, are also due for a recovery, as SIA Engineering is proactively working with airlines and engine OEMs to bring forward service volume in anticipation of a peak in demand with the aviation sector’s full recovery.

Positive core profit around the corner.

• Within our Singapore aviation coverage space, SIA Engineering is representing 57% of its pre-COVID-19 (FY19) level.

Positive business developments preparing SIA Engineering for future growth.

• SIA Engineering has made Malaysia would allow SIA Engineering to optimise the cost structure of its component maintenance, repair and overhaul (MRO) businesses.

Dividend outlook raised in the medium term.

• In the light of its earnings recovery and strong balance sheet (S$679m in net cash), SIA Engineering is well positioned to resume dividend payment in as early as FY23. We do not rule out the possibility of a special payout by FY24, given its major shareholder SIA (SGX:C6L)’s cash needs for MCB redemption.

Re-initiate coverage on SIA Engineering with BUY

• Re-initiate coverage on SIA Engineering with stands at 2.3 standard deviation below its 5-year mean in a normal market.
• SIA Engineering is our top sector pick.
• See
  • SIA Engineering's Share Price,
  • SIA Engineering's Target Price,
  • SIA Engineering's Analyst Reports,
  • SIA Engineering's Dividend History,
  • SIA Engineering's Announcements,
  • SIA Engineering's Latest News.
• Potential catalysts include a faster-than-expected earnings recovery and dividend resumption.
• Risks include events that disrupt the sector’s recovery and stiffer competition for its MRO business.

Roy CHEN CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-28

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