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DBS downgrades SIA Engineering two notches, slashes target price

It cuts FY2021 revenues by 18%, net profit by 48% and expects dividends to take a beating

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As SIA Engineering 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.

Singapore

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

The research house also cut FY2021 revenues for SIAEC by 18 per cent and shaved net profit by 48 per cent. Dividends are "likely to take a beating" in FY2021, it added.

Analysts Suvro Sarkar and Jason Sum said in a Friday report that 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.

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 analysts noted.

DBS Group Research is expecting a 20 per cent year on year decline in Changi's air traffic for the 2021 financial year.

The analysts said that consensus net profit estimates have yet to take into account the full impact of air traffic slowdown on SIAEC's numbers. Impact is also likely to be worse than what was seen during the severe acute respiratory syndrome crisis in FY2004, they said.

The heavy maintenance segment has also been stuck in the doldrums for a while and will not be able to cushion the fall in line with maintenance revenues, the report said.

SIAEC closed at S$1.64 on Friday, up S$0.08 or 5.1 per cent.

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.