Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


SIA Engineering - Preferred Proxy to Ride Singapore Aviation Recovery

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  • 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

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Chart Stock Name Last Change Volume 
SIA Engineering 2.36 -0.04 (1.67%) 1,131,700 

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