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Broker's take: DBS downgrades SIAEC to 'hold' on slower MRO unit recovery

DBS Group Research has downgraded SIA Engineering (SIAEC) to "hold" from "buy" with a lowered target price of S$1.60 from S$2.40 previously, as recovery for the group's maintenance, repair and overhaul (MRO) business will be slower than anticipated.

DBS analysts Suvro Sarkar and Jason Sum said in a research note on Thursday that recovery in flight traffic remains very slow at Changi Airport, which is the main base for SIAEC's line maintenance operations.

The absence of a domestic aviation market in Singapore will also continue to constrain the group's earnings recovery over the next few quarters, they added.

"Eventual recovery to pre-Covid-19 levels could take as long as 2023/24 for the MRO sector," they said.

SIAEC, the mainboard-listed maintenance arm of Singapore Airlines, on Tuesday posted a net loss of S$19 million in the first half of its financial year. This was a reversal from the S$87.6 million net profit it recorded in the April-September period in 2019.

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Without the cushioning from government support schemes, most significantly the Jobs Support Scheme (JSS), net loss would have been S$114 million instead of S$19 million, the group said at the time. It also recognised a non-cash impairment loss on its base maintenance unit's assets of S$35 million.

For DBS, the headline loss of S$19 million incurred by SIAEC in the first half was worse than expected despite the JSS grants. SIAEC's second-quarter results for fiscal 2021 also fell short of the research team's expectations.

The analysts project SIAEC to report a full-year loss of around S$16 million in fiscal 2021, which would have been significantly higher if not for JSS grants.

Mr Sarkar and Mr Sum cut their earnings projection for fiscal 2022 by 43 per cent, as they expect line maintenance to only recover around 40 to 45 per cent of pre-Covid-19 levels by then, instead of their previous assumption of 80 per cent. If recovery is even slower, there could be further downside to their fiscal 2022 estimates.

With full-year losses likely in FY2021, the analysts believe dividends could be off the table in FY2021, as these are usually based on net profit levels. As for fiscal 2022, they are projecting five Singapore cents per share in dividends.

Shares of SIAEC were trading down 1.8 per cent or S$0.03 to S$1.63 as at 1.01pm on Thursday.

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