SIA Engineering's near-term profitability unlikely to return to pre-pandemic levels, CGS-CIMB maintains 'hold'

The analysts believe that SIAEC will continue to face labour issues in the medium-term.

Although SIA Engineering Company (SIAEC) S59 is expected to enjoy the further recovery in flight volumes, CGS-CIMB Research analysts Kenneth Tan and Lim Siew Kee believe that its profitability in the near-term is unlikely to return to pre-pandemic levels, given high staff costs.

Citing data from Centre for Aviation, the analysts highlight that flight movements out of Singapore stood at 82% of pre-Covid-19 levels on Apr 2 while June forward flight movements indicate that volumes could recover to 86% of pre-Covid-19 levels by the end of the month.

Tan and Lim see more meaningful volume recovery in 2H2023, given time lag for airlines to ramp up China-Singapore routes as well as the recent assumption of foreign visa issuance in China.

CGS-CIMB expects SIAEC to report its 4QFY2023 ended March results in the first week of May 2023. For the quarter, CGS-CIMB forecasts SIAEC to report a 95% y-o-y growth in net profit to $19 million, driven by slight improvement in operating loss and continued associates recovery. The analysts also see strong growth for topline and associates as flight volumes at Changi Airport continue to recover.

Staff costs, however, are expected to remain high at $122 million, a 34% increase y-o-y, continuing to be a drag on earnings. “While we do see a near y-o-y doubling in 4QFY2023 net profit, we expect net profit margin to stay weak at 8.6%,” they add.

The analysts also highlight that labour shortages would be an ongoing concern in the industry. For one, maintenance, repair and overhaul (MRO) provider Lufthansa Technik in its FY2022 results mentioned labour shortage as a key near-term challenge faced, expecting it to persist in 2023 and beyond.

Aircraft engine supplier Rolls-Royce sees a similar situation, with the whole industry facing challenges in tackling labour shortage issues as flight volumes recover, the analysts add. “We see a similar tone from Oliver Wyman’s 2023 MRO outlook — the group expects mechanic headcount deficits to linger or grow over the next ten years.”

To this end, CGS-CIMB believes that SIAEC will continue to face labour issues in the medium-term, given skilled workers leaving and not returning to Singapore and the time lag to develop a pipeline of young technicians.

Tan and Lim have maintained “hold” on SIAEC with a target price of $2.42.

As at 10.04am, shares in SIAEC are trading 3 cents lower or 1.31% down at $2.25.

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