• Line maintenance services to be driven by higher flight activity from recently opened VTLs in Singapore. Rollout of further VTLs expected in 2HFY22F.
• Return-to-service of grounded planes and dismantling of Singapore Airlines’ A380 planes should accelerate SIA Engineering’s return to profitability in FY22F.
• We prefer SIA Engineering to SIA due to its low reliance on passenger load. SIA Engineering's valuations currently look cheap at 1.6x CY21F P/BV (-1.5 standard deviation from mean). Maintain ADD.

Opening of VTLs to Drive More Line Maintenance Works

• As announced on 9 Oct, vaccinated travel lanes (VTLs) will be opened up to 9 countries (US included), with 8 VTLs starting from 19 Oct 2021. We view this as a strong positive for SIA Engineering (SGX:S59), as we expect a steady recovery in flights handled at Changi Airport.
• Flights handled by SIA Engineering at Changi Airport in 1QFY22 recovered to ~10k flights (+97% y-o-y, +13% q-o-q) even with Singapore maintaining tight borders. With flight activity expected to gain traction in FY22F, spurred by both inbound travellers and locals flying abroad, we see scope for more line maintenance works to be performed.
• SIA Engineering’s maintenance operations in Singapore and the US stand to benefit the most from current VTL arrangements, with Japan operations next in line as Singapore explores the opening of a SG-JP VTL.

Further Boost From Grounded Planes Resuming Flight

• We expect a ramp-up in SIA Engineering’s overhaul and maintenance Max planes by the Singapore Aviation Authority should further support SIA Engineering and its key JV (Boeing Asia Pacific Aviation Services).

Aircraft Dismantling Should Support FY22F/23F Revenue

• As announced in Oct 2021, SIA (SGX:C6L) has commenced the dismantling of two of its Airbus A380 and one Singapore too, we could see an uplift to SIA Engineering’s FY22F/23F revenue.

Line Maintenance Safer Compared to Airlines

• We believe that SIA Engineering’s operations are much less of a Singapore-Japan VTL would be beneficial to SIA Engineering’s operations in Japan.

Prefer SIA Engineering to SIA; Reiterate ADD at Unchanged Target Price

• Post announcement of new VTLs, SIA Engineering's share price has risen by more corporate actions and the reinstatement of dividend payouts in FY22F (no dividends were issued in FY21).
• We reiterate ADD at an unchanged target price, which is based on 2.0x CY21F P/BV (average 12-month trading band just before the COVID-19 pandemic).
• Key catalysts include quicker reopening of borders and shareholder corporate action.
• Key downside risks include another uncontrolled pandemic and tightening of border controls. This would adversely impact flight traffic at Changi Airport, reducing demand for SIA Engineering’s line maintenance and engine services.
• Read also Singapore Airlines (SIA) - CGS-CIMB Research 2021-10-18: Time To Look At Downside Risks.

Source: CGS-CIMB Research - 15 Oct 2021