Analysts are keeping a positive stance on SIA Engineering (SIAEC) following the group's announcement of its 1QFY2023 ended June results.
To recap, SIAEC on July 25 announced that its profit after tax was 11.7% lower y-o-y at $12.8 million, while revenue was 36.9% higher y-o-y at $171.5 million. The revenue growth was largely driven by the increase in line maintenance revenue due to the higher number of flights handled.
As at June 30, equity attributable to owners of the parent was $1.64 billion, an increase of $32.2 million, or 2.0%, q-o-q.
See: SIA Engineering profit after tax dips 11.7% y-o-y in 1QFY2022/23, wage support ends July
To that end, UOB Kay Hian is keeping its "buy" recommendation with an unchanged target price of $2.70 on SIAEC, while keeping the stock as its top pick among the Singapore aviation plays. Analyst Roy Chen notes that this is the first quarter that the group returned to positive core profitability, excluding government support.
Thus far, the group's 1QFY2023 results have been largely in line with the analyst's forecasts, and he sees the improvement in this quarter as encouraging.
"1QFY2023 ex-relief core net profit of $4.2 million (core net loss of $24.1 million a year ago) is a good start and we expect SIAEC’s profitability to continue to improve for the rest of FY2023, driven by the rising flight activities at Changi Airport. With the positive core profitability and SIAEC’s strong balance sheet, we expect a meaningful recovery in dividend payment in FY2023," says Chen.
Apart from the upbeat service volume recovery, Chen believes that SIAEC’s relatively faster return to profitability, compared to other aviation plays was also attributable to its high staff retention during the pandemic, which allowed the group to quickly ramp up its operations to meet the air travel recovery without aggressively raising headcounts.
The way Chen sees it, 1QFY2023 is a good start for the year for SIAEC and he expects core profitability to continue improving for the rest of FY2023. Hence, he expects the stock to resume dividend payment in FY2023, as he is forecasting dividends of about 8 cents, while not ruling out the possibility of a special payout, considering SIAEC's net cash position improved.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Overall, Chen likes the stock for its good visibility of its business recovery; local market leadership (78% market share of Changi Airport line maintenance business volume); and cheap valuation.
Flying in the same path, CGS-CIMB Research is also reiterating its "add" call on SIAEC with an unchanged target price of $2.92. Analysts Kenneth Tan and Lim Siew Khee like the stock as a proxy for a further recovery in regional flight activities.
The analysts have noted that SIAEC is currently operationally at about 53% of pre-Covid levels, and while they are upbeat on the group's improvement, the group's management are remaining cautious on the outlook.
"Passenger traffic at Changi Airport recovered to 46% of pre-Covid levels in May, according to the latest data from Changi Airport. While aviation volumes are expected to pick up in the coming quarters, management highlighted several key challenges of concern to the group: labour shortages, weakening macroeconomic conditions, supply chain disruptions, and potential outbreaks from new Covid-19 variants," writes Tan and Lim in a July 25 report.
On the other hand, SIAEC completed the 75% stake acquisition of Malaysia-based component maintenance, repair and operations (MRO) service provider SR Technics Malaysia (SRTM) on May 31. While SRTM was loss-making in both FY2020 and FY2021 (due largely to tight border measures in Malaysia), the analysts expect losses to narrow in FY2022 with Malaysia fully reopening its international borders on Apr 1.
In August, SIAEC will also cease operations of its joint venture with Boeing (BAPAS) due to a challenging operating environment. Tan and Lim believe that this is slightly positive for the group as BAPAS has been loss-making since 1HFY2018, and think that SIAEC could book about $5 million in impairment charges in 2QFY2023.
Finally, OCBC Investment Research is retaining its “buy” call on SIAEC with an unchanged fair value estimate of $2.90.
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“We continue to see SIAEC as a beneficiary of air travel demand recovery, and could see further recovery ahead in FY2023, barring any unforeseen circumstances,” says analyst Chu Peng.
To her, a stronger-than-expected recovery in contributions from the company’s associated and joint venture (JV) companies, as well as a recovery in earnings in its core business are potential catalysts to SIAEC’s share price.
On the flip side, lower contributions from associated and JV companies, a reduction in dividends and SIAEC’s significant dependence on Singapore Airlines (SIA) for maintenance jobs are risks to the counter.
As at 1.00pm, shares in SIAEC are trading at $2.41.
