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VTLs spur more optimism

  • 1HFY22 net profit of S$25m in line with estimates, no room for dividends though 
  • Optimism on recovery prospects increase from launch of multiple VTLs in Singapore
  • Recovery of air travel over next 2 years should lead to strong earnings rebound in FY23/24  
  • Upgrade to BUY with higher TP of S$2.65 
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Upgrade to BUY, play on reopening of borders, though core profitability still some way away. The launch of Vaccinated Travel Lanes (VTL) between Singapore and Malaysia from end-November, in addition to other VTLs, should boost sentiment for the stock, and aid the slow recovery in flight traffic at Singapore Changi Airport, the main base for SIE’s line maintenance operations. Accounting for better market sentiment, we raise our valuation pegs and revise up our target price (TP) to S$2.65. However, note that core earnings turnaround is still a few quarters away. Despite the launch of more VTLs in Singapore, the absence of a domestic aviation market and delays in full opening of international borders in the region will continue to constrain SIE’s earnings recovery over the next two quarters, as will the tapering of wage subsidies. Beyond that, earnings recovery in FY23/24 should be more material, as air traffic trends normalise. 

Potential M&A target on the table provides excitement. SIE has signed an MoU to explore the acquisition of SR Technics Malaysia, which, if completed, will ensure SIE has a foothold in the higher growth narrow-body aircraft component MRO space, as compared to its current widebody fleet expertise.

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Other key upside catalysts include privatisation potential,faster-than-expected rollouts of antiviral pills and speedy restoration of international flights. We are factoring in 20% privatisation premium in our TP.

Valuation:

Upgrade to BUY with higher TP of S$2.65. The TP is based on a blended valuation framework (growth + cash flows). 

Where we differ:

We remain cautious on the pace of recovery for SIE from the opening of VTLs in Singapore in the near term. 

Key Risks to Our View:

Downside risk from lack of corporate actions and slower-than-expected opening up of regional borders.s.