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OCBC Investment Research cuts SIAEC’s target price on cost pressures

Lim Hui Jie
·2-min read

Despite cutting her fair value estimate, OCBC's Chu still sees SIAEC as a benificary for air travel recovery.

OCBC Investment Research’s Chu Peng has maintained her “buy” rating on SIA Engineering Company (SIA EC) but has cut her fair value estimate from $2.90 to $2.60 in light of the company’s 1HFY2023 ended September results.

For its 1HFY2023, SIA EC’s revenue increased 37.5% y-o-y to $362.2 million, boosted by higher contributions from all segments.

Share of profits of joint ventures (JVs) and associates also rose 54.5% y-o-y to $41.4 million, and consequently, the company’s patmi improved by 30% y-o-y to $32.5 million.

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Excluding the impact of wage support of $11.1 million, patmi for SIA EC would have been $21.4 million.

SIA EC also reported that flights handled at Changi by line maintenance doubled y-o-y in 1HFY2023, representing about 55% of pre-Covid workload. This number improved to 63% of pre-Covid volume as of the end of September.

Chu thinks that “as airlines increase capacity and look to return grounded aircraft back to service, we believe the demand for maintenance, repair and overhaul (MRO) business will continue to improve.”

She also continues to see SIA EC as a “beneficiary” of air travel demand recovery.

However, Chu warns that cost pressure could remain in the near term as SIA EC continues to ramp up operations to prepare for the recovery ahead.

She elaborates that expenditure for SIA EC in 1HFY2023 grew 38% y-o-y to $373 million, in tandem with increased flight activities and the stepping down of government wage support.

The growth in expenditure outpaced the improvement in revenue, leading to an operating loss of $10.8 million, compared to a $6.7 million loss a year ago for SIAEC in 1HFY2023. SIA EC also did not declare a dividend, similar to the same period last year.

As of 9.25am, shares of SIA EC were trading at 2.21, up three cents or 1.38% higher than its previous close.

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