Brokers’ take: DBS downgrades SIA Engineering to ‘hold’ as reopening gains are likely priced in

DBS Group Research on Monday (May 9) downgraded SIA Engineering (SIAEC) to “hold” from “buy”, as reopening gains are likely already accounted for in its current share price. It maintained a target price of S$2.65.

Stocks of the maintenance arm of Singapore Airlines were trading at S$2.59 as at 3.50 pm on Monday, down S$0.02 or 0.8 per cent. The target price represents a potential upside of 2.3 per cent.

The gradual easing of border controls in Singapore has boosted sentiment for the stock in recent months, with share price up close to 20 per cent year to date, outperforming the broad index and other aviation counters such as Singapore Airlines, SATS and ST Engineering, the research team noted in a report.

DBS said that the group’s core earnings turnaround is still a couple of quarters away, considering flight traffic at Changi Airport is still at around 40 per cent of pre-pandemic levels.

DBS had also lowered their FY2023 and FY2024 net profit estimates by 27 per cent and 8 per cent respectively, to account for higher cost expenditure in building new facilities and capabilities in Malaysia, as well as a slower than expected recovery at its joint venture or associates level.

On top of tapering wage subsidies, the ongoing lockdown in China, an absence of a domestic aviation market and delays in the full opening of regional borders will also continue to constrain the group’s earnings recovery, DBS said.

The research team also noted that there were no dividends declared for FY2022, although that was within expectations.

The research team said it “remains cautious on the pace of earnings turnaround in the near term”.

Meanwhile, CGS-CIMB maintained an “add” call to SIAEC’s stock with an unchanged target price of S$2.92.

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The brokerage noted that the group’s net profit of S$43 million for its second half of FY2022 was below their expectations.

While CGS-CIMB forecasts that there will be an estimated increase in staff costs by 43 per cent year-on-year in FY2023, they believe SIAEC’s valuation is still attractive.

CGS-CIMB noted that the group’s net cash remains strong, and also forecasts the aviation sector to have a 90 per cent recovery by 2024 with the easing of Singapore's border measures.

SIAEC last Thursday posted a net profit of S$42.6 million for the 6 months ended Mar 31, as earnings rebounded on a writeback of associates’ tax provisions. But, the board warned of risks to its business outlook as SIAEC was still ringing up operating losses, with its full-year bottom-line sustained only by “substantial government wage support”.