Broker's take: DBS upgrades SIAEC to 'buy' on launch of more Vaccinated Travel Lanes

SIA Engineering Company (SIAEC) S59 : S59 0% will likely gain from the imminent implementation of more Vaccinated Travel Lanes (VTLs), as the move is likely to boost positive sentiment for the stock, DBS Group Research said.

In a report on Tuesday (Nov 9), the research team upgraded the mainboard-listed provider of maintenance, repair and overhaul (MRO) services to a "buy" from "hold", noting that SIAEC is a play on reopening of borders, although its core profitability is still some way off.

It also raised its target price on the counter to S$2.65 from S$2.05, after factoring in a privatisation premium of 20 per cent.

Shares of SIAEC were trading at S$2.39 as at 11.06 am on Tuesday, up S$0.10 or 4.4 per cent.

DBS said that positive market sentiment, and expectations that earnings will normalise by FY2023 and FY2024, will likely lead to a re-rating.

The research team also expects dividends will be restored from FY2023 onwards, noting that SIAEC's management has indicated that it will resume dividends when the company achieves profitability without any government grants.

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The recent announcement of the Singapore-Kuala Lumpur VTL should boost traffic at Changi Airport, the main base for SIAEC's line maintenance operations, especially as existing VTL countries comprised less than 20 per cent of total traffic in 2019, DBS said.

Recent positive news flow on Pfizer's Covid-19 antiviral pills is also another catalyst for the aviation sector.

However, DBS said that the VTLs may not be adequate to push SIAEC back into the black immediately as it does not expect a sharp increase in flight activity levels over the next 2 quarters.

SIAEC posted net profit of S$10.5 million in Q2 FY2022, bringing H1 FY2022 net earnings to S$25 million. But excluding the S$64.5 million in Jobs Support Scheme grants it recognised in H1 FY2022, the group would have incurred a net loss of S$39.5 million for the half-year period.

Earnings in the next 2 quarters will likely also be weighed down by the absence of a domestic aviation market and delays in the full reopening of international borders in the region, as well as tapering wage subsidies.

DBS expects recovery will be in the medium term over FY2023 and FY2024, with net profit doubling in FY2023 and growing around 40 per cent in FY2024, though the figures may still be below pre-Covid-19 levels.

Additionally, SIAEC's potential acquisition of SR Technics Malaysia "provides excitement" as it will ensure SIAEC has a foothold in the higher-growth narrowbody aircraft component MRO space, compared to its current widebody fleet expertise, the research team said.

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