Brokers' take: UOBKH positive on aviation sector on better-than-expected SIA Engineering results

OBSERVING SIA Engineering Company's S59 (SIAEC) better-than-expected net profit of S$14.5 million, UOB Kay Hian(UOBKH) analyst K Ajith has upgraded the company to "hold" with a target price of S$2.25, up from S$2.

He noted that SIAEC's net profit was due to a steep rise in joint venture and associate earnings, which matched pre-pandemic levels.

While SIAEC did not provide any reason for the quarter-on-quarter improvement in net profit from S$100,000 in the preceding quarter, the analyst believes that it could be related to a pickup in service checks on Singapore Airlines (SIA) and third-party airlines or the absence of an impairment charge.

Despite the improvement in Q1 FY2022, the extent and sustainability of the improvement in joint venture and associate earnings are still uncertain. Furthermore, he noted that the engine joint ventures and associates that have benefited from Job Support Scheme payouts will expect to see them decline over the next three quarters.

Still, Mr Ajith noted that SIAEC could benefit from higher line maintenance revenue if SIA adds capacity and has raised SIAEC's net profit forecast from S$7 million to S$50.9 million.

Additionally, he said that SIAEC's engine maintenance-related joint venture and associate earnings are likely to signal a similar improvement in ST Engineering's S63 aerospace business as well and maintained a "buy" call on the company with a target price of S$4.26.

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He noted that the engineering conglomerate's partner in the US, Honeywell, also reported better-than-expected Q2 FY2021 results, with aerospace revenue rising 9 per cent year on year on the back of double-digit sequential improvements in its maintenance, repair and overhaul segment.

Regarding Singapore's aims to start quarantine-free travel in September, the UOBKH analyst noted that while there is uncertainty as to whether such travel refers to returning travellers out of Singapore or inbound travellers, the recovery in air travel will likely be gradual given the slower rates of vaccinations outside of Singapore.

Finance Minister Lawrence Wong said on Monday that as 80 per cent of Singapore's population is likely to have been vaccinated against Covid-19 by early September, Singapore could begin reopening borders and establishing travel corridors with other countries and regions.

With these factors in mind, he has maintained market weight on the aviation sector.

Shares of SIAEC traded up 1.9 per cent or S$0.04 at S$2.12, while shares of ST Engineering increased 0.5 per cent or S$0.02 at S$3.98 as at 10.53am on Tuesday.