• An immediate beneficiary of airlines’ increasing flight activities at Changi Airport, SIA Engineering is likely the first to regain core profitability under our Singapore aviation coverage.
• We see a good chance for SIA Engineering's dividend to rebound to a meaningful level in as early as FY23, backed by its strong net cash (about 26% of market cap). There is also hope for a special dividend payout by FY24, given its parent SIA’s cash needs for MCB redemption.

An Immediate Beneficiary of Increasing Flight Activities

• SIA Engineering (SGX:S59)’s line maintenance service (about 50% of its pre-COVID-19 revenue) would immediately benefit from airlines’ increasing flight activities at Changi Airport, which we believe would outpace the expected passenger volume recovery. This puts SIA Engineering in a faster lane of recovery vs other aviation plays whose financial performances are more geared to the relatively lagged passenger volume growth.
• SIA Engineering’s engine & components JVs, which demonstrated good resilience during the pandemic, are also due for a recovery, as SIA Engineering is proactively working with airlines and engine OEMs to bring forward service volume in anticipation of a peak in demand with the aviation sector’s full recovery.

Positive Core Profit Around the Corner

• Within our Singapore aviation coverage space, SIA Engineering is representing 57% of its pre-COVID-19 (FY19) level.

Positive Business Developments Preparing SIA Engineering for Future Growth

• SIA Engineering has made Malaysia would allow SIA Engineering to optimise the cost structure of its component maintenance, repair and overhaul (MRO) businesses.

Dividend Outlook Raised in the Medium Term

• In the light of its earnings recovery and strong balance sheet (S$679m in net cash), SIA Engineering is well positioned to resume dividend payment in as early as FY23. We do not rule out the possibility of a special payout by FY24, given its major shareholder SIA (SGX:C6L)’s cash needs for MCB redemption.

Re-initiate Coverage on SIA Engineering With BUY

• Re-initiate coverage on SIA Engineering with stands at 2.3 standard deviation below its 5-year mean in a normal market.
• SIA Engineering is our top sector pick.
• Potential catalysts include a faster-than-expected earnings recovery and dividend resumption.
• Risks include events that disrupt the sector’s recovery and stiffer competition for its MRO business.

Source: UOB Kay Hian Research - 28 Mar 2022