Singapore, Malaysia aviation sectors near recovery to pre-Covid levels: UOBKH

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WITH Singapore and Malaysia fully reopening their international borders from Apr 1, UOB Kay Hian (UOBKH) is anticipating their aviation sectors to chart a strong recovery in passenger volumes and earnings over the immediate years to come.

Both countries' aviation sectors have been maintained at "market weight".

UOBKH projects Malaysia's passenger traffic volumes to regain 53 per cent and 93 per cent of pre-pandemic levels in 2022 and 2023, respectively. This comes on the premise of pent-up travel demand, the progression of Covid-19 towards endemic status and smooth cross-border flows within the Asean region.

The research house has upgraded Malaysia Airport to "buy" from "hold" as it estimates earnings will now recover close to 2019 levels as early as 2023. It also likes the stock for its attractive valuations of 7.9 times FY2023 earnings projections, which is well below the pre-pandemic 5-year mean of 10 times.

Capital A, formerly known as AirAsia Group, remains at "hold" as UOBKH highlighted concerns over the group's PN17 status, which indicates the company is in financial distress.

"The group will also require more time to restore its financial health and ensure its book value deficit of -80 sen per share (as of Q4 2021) turns profitable," said UOBKH analyst Jack Goh in a Wednesday (Mar 30) report.

Meanwhile, UOBKH predicts that the net profits of SIA Engineering (SIAEC), SATS and Singapore Airlines (SIA) are due for a recovery to pre-pandemic levels by FY2025.

Analyst Roy Chen opined in a separate report on Monday that SIAEC's recovery will come at the fastest pace. Its line maintenance services business has already reached about 50 per cent of its pre-Covid revenue level, he noted.

SIAEC is the brokerage's top pick within the Singapore aviation sector followed by SATS, whose ground handling services business has reached 30 per cent of pre-Covid revenue levels. Both companies are in net cash positions, and their businesses which are directly geared to flight activities are expected by UOBKH to recover faster.

The 2 counters have been rated "buy" and are expected to resume dividend payments from FY2023, as the brokerage believes they will return to profitability even without government grants.

The magnitude of dividend recovery could however be more meaningful for SIAEC, said Chen, due its faster pace of profitability recovery and stronger net cash position compared to SATS.

SIA is the only counter among the 3 aviation plays to be rated at "hold", as Chen foresees the legacy impacts of Covid-19 will be more long-lasting given the significant size of its dilutive mandatory convertible bonds (MCBs).

He does not expect a dividend from SIA in the medium term. The analyst also cautions that the national flagship carrier has seen its valuation run "beyond the justified level by traditional valuation metrics".

Based on his estimates, Chen thinks SIA shareholders should "almost always" prefer to have the MCBs redeemed than converted. The analyst also believes it is in the best interests of shareholders for the MCBs to be redeemed at the earliest possible date, considering the group's borrowing cost of about 3 per cent in normal market conditions.

"However, this also means SIA's earnings recovery provides less accretion for shareholders' value in the medium term (since the priority now is to redeem and pay off the MCBs)," explained the analyst.

Negative impacts of Covid-19 on its peers SATS and SIAEC in comparison will be "largely transient", because the impairments so far are largely one-off in nature and would not jeopardise the companies' value accretion for shareholders as they emerge from the pandemic, he said.

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