Brokers' take: CGS-CIMB upgrades SIA Engg to 'add' on expected rise in travel

Published Fri, Apr 9, 2021 · 01:36 PM

CGS-CIMB has upgraded SIA Engineering Company (SIAEC) to "add" from "hold" previously, citing potential border reopenings and pent-up travel demand that may contribute to the orderly opening of Changi Airport by September 2021.

Its has raised the target price for the counter to S$2.85 from S$1.78 previously.

In the report on Friday, the brokerage noted that "the worst could be over for (SIAEC)" as it forecasts the company to turn profitable around FY2022. As more flights through Changi gradually resume and more travel bubbles established, analyst Lim Siew Khee said the risk rewards for SIAEC are improving, with limited downside risks.

Already a beneficiary of the strong cargo trend due to line maintenance operations, she added that with the backing of net cash amounting to approximately S$500 million, there is opportunity for accretive mergers and acquisitions (M&A) to increase the company's market share.

With its stronger balance sheet, SIAEC is expected to hunt for more M&As as its competitors potentially see steeper performance declines due to a lack of government support.

CGS-CIMB noted that while the share price of Singapore Airlines has rallied about 34 per cent to date due to optimism that ongoing global Covid-19 vaccine rollouts will help reopen international borders and restore global travel, SIAEC's shares are up only about 11 per cent. Ms Lim believes that liquidity could be a reason for the relative share price underperformance.


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Nonetheless, SIAEC is slightly more sheltered from passenger load capacity, said the report. This is because line maintenance work is performed based on the turnaround frequency of aircraft, regardless of passenger load. Thus, as the government plans to expand Changi's connectivity from 66 cities during the pandemic to about 80 cities in the next few months, Ms Lim said the company's line maintenance operations are set to benefit.

SIAEC's key line maintenance operations based in Singapore, the United States, Japan and Hong Kong could be among the first to benefit, CGS-CIMB said.

The brokerage has raised its core earnings per share forecasts for FY2022-23 by between 13 and 18 per cent. This is based on expectations that line revenue maintenance levels will return to 61 per cent of pre-pandemic levels by FY2022, and 85 per cent by FY2023.

Shares of SIAEC closed 14.1 per cent or S$0.31 higher at S$2.51 on Friday.

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