Singapore Aviation - UOB Kay Hian 2022-03-28: Embarking On The Recovery Journey

SGinvestors.io

SINGAPORE AIRLINES LTD (SGX:C6L) SIA ENGINEERING CO LTD (SGX:S59) SATS LTD. (SGX:S58)

Singapore Aviation - Embarking On The Recovery Journey

• The recovery of the Singapore aviation sector is well on track. The consensus among aviation experts indicates that the sector is likely to recover to the pre-COVID-19 level towards end-24 (FY25 for Singapore-listed players).
• Among the three aviation plays under our coverage, SIA Engineering (SGX:S59) (BUY, Target Price: S$2.80) is our top pick to ride the recovery, followed by SATS (SGX:S58) (BUY, Target Price: S$4.65) and SIA (SGX:C6L) (HOLD, Target Price: S$4.80).
• We maintain MARKET WEIGHT on the Singapore aviation sector.

Singapore aviation sector expected to recover by end-24 (FY25).

• International Air Transport Association has forecasted global air travel passenger volume to recover to 103% of the pre-COVID-19 level by 2024, with APAC tracking slightly behind at 97% of the pre-COVID-19 level. Our conversations with the management of the three listed Singapore aviation companies (SIA (SGX:C6L), SATS (SGX:S58) and SIA Engineering (SGX:S59)) have revealed a similar timeline – the consensus is that the Singapore aviation sector is likely to fully recover by FY25.

Singapore fully opening its borders, a major push to drive recovery.

• Singapore has recently joined a number of its neighbouring countries in lifting most of the restrictions on international travel. From 1 Apr 22, fully vaccinated travellers from all origins can enter Singapore free of quarantine and on-arrival tests.
• We deem the relaxation as a big positive development for Singapore aviation and expect it to help Singapore move closer towards its goal to restore the passenger volume at Changi Airport to at least 50% of the pre-COVID-19 level in 2022.

Varying paces of recovery, SIA Engineering the fastest, followed by SATS.

• Due to airlines’ proactive capacity re-activation plans (SIA will re-activate a flight as long as the operation is cash-generative), we expect flight activities to recover relatively faster than passenger volume.
• As such, revenue of businesses directly geared to flight activities, including SIA Engineering’s line maintenance services (about 50% of its pre-COVID-19 revenue) and SATS’s ground handling services (30%) should recover faster than revenue of businesses linked to relatively lagged passenger volume, such as SIA’s passenger flown revenue (80%) and SATS’s infight catering revenue (40%).

MCBs, SIA’s legacy baggage from COVID-19.

• To ensure it can stay afloat and fulfil its significant capital commitment, SIA issued S$9.7b of mandatory convertible bonds (MCB) at the height of the pandemic. However, these MCBs would turn out to be highly dilutive if they are held to maturity and get converted.
• We believe MCBs have to be redeemed (and better early than late), before the earnings recovery can deliver meaningful value accretion to SIA’s shareholders. The impact of COVID-19 on SIA Engineering and SATS is largely transient (manifested by goodwill/PPE impairments, one-off in nature).

Maintain MARKET WEIGHT on the Singapore aviation sector.

• We expect positive news flow on air traffic recovery and Singapore’s further opening up to keep sentiment towards the aviation sector buoyant in the medium term. However, we caution that SIA, the largest listed proxy to Singapore aviation, has had its valuation run beyond the justified level by traditional valuation metrics.
• Catalysts and risks. Some general catalysts for the aviation sector include a faster-than-expected pace of global opening up and travel relaxation. Downside risks include possibly more infectious/fatal COVID-19 variants that disrupt the global opening up process or further escalation of the Russia-Ukraine war which may dampen travel sentiment.

Re-initiate coverage on SIA, SATS and SIA Engineering.

• SIA Engineering is a BUY, with a target price of S$2.80 (FY23 DCF, WACC: 8.5%, terminal growth: 3.0%).
• SATS is also a BUY, with a target price of S$4.65 (FY23 DCF, WACC: 7.0%, terminal growth: 3.0%).
• We recommend a HOLD on SIA with a target price of S$4.80 (FY25 DCF, WACC: 6.0%, terminal growth: 3.0%).
• See more in reports:
  • SATS - UOB Kay Hian 2022-03-28: Preparing To Emerge Stronger.
  • SIA Engineering - UOB Kay Hian 2022-03-28: Preferred Proxy To Ride Singapore Aviation Recovery.
  • Singapore Airlines - UOB Kay Hian 2022-03-28: Recovery On Track, MCB Redemption A Priority.

Dividend outlook.

• We expect SIA Engineering and SATS (both in net cash positions) to resume dividend payment in FY23 when the two would have returned to positive core net profits (excluding government grants) by our estimates.
• SIA Engineering’s dividend outlook is further raised by its 77.6% shareholder SIA’s cash needs for MCB redemption (likely in early-FY25). As such, we do not rule out the possibility of a special payout by SIA Engineering by FY24.
• SIA Engineering (top pick) and SATS are our preferred proxies to ride the Singapore aviation sector recovery.
• See the report attached below for complete analysis.

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

SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.800 SAME 4.800

BUY MAINTAIN BUY 2.800 SAME 2.800

BUY MAINTAIN BUY 4.650 SAME 4.650