Broker's take: SIA Engineering downgraded two notches, TP slashed

DBS Group Research has downgraded SIA Engineering Company (SIAEC) by two notches to "fully valued" from "buy", and slashed the price target to S$1.35 from S$3.30.

As at 10.34am, SIAEC shares were trading at S$1.64, up S$0.08 or 5.1 per cent.

Analysts Suvro Sarkar and Jason Sum said in a Friday report that consensus net profit estimates have yet to take into account the full impact of air traffic slowdown on SIAEC's numbers.

"The impact is likely to be worse than what we saw during the severe acute respiratory syndrome crisis in FY2004," they said.

The analysts added that the heavy maintenance segment has been stuck in the doldrums for a while and will not be able to cushion the fall in line maintenance revenues.

SIAEC's improved momentum on core operating profits for the first nine months of 2020 will likely come to a "screeching halt" as the Covid-19 outbreak has curbed air travel.

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As SIAEC generates a substantial portion of its core operating profits from its line maintenance operations at Singapore's Changi Airport, it is vulnerable to the loss of revenue from a fall in aircraft movements at Changi.

Global restrictions and clampdowns on travel will also only intensify in the coming months, the research house noted.

DBS Group Research is expecting a 20 per cent year on year decline in Changi's air traffic for the 2021 financial year. It has also cut FY2021 revenues for SIAEC by around 18 per cent and net profit by 48 per cent.

"Dividends will also likely take a beating in FY2021," the analysts added.

On Thursday, OCBC Credit Research lowered its credit rating for SIAEC parent company Singapore Airlines, while DBS Group Research downgraded the counter to "hold" and cut its target price to S$6.60.