SIA, SATS, ST Engineering: Which aviation stock will recover first?

The global aviation sector has been in doldrums since  Covid-19  became widespread, and Singapore&rsquo s three largest aviation firms Singapore Airlines (SIA), SATS and ST Engineering (STE) have not been spared from the virus&rsquo negative impacts either.

Since June 2020, shares of SIA, SATS and STE have declined 19%, 15% and 6% respectively.

Below, we take an in-depth look at the stock outlook of each company.

SIA (SGX: C6L)

 

Latest share price: S$3.52

Average 12-month target price: S$3.41

Estimated return potential: -3.1%

Eight out of 12 brokers polled by Bloomberg rated  SIA  a &lsquo hold&rsquo as of 17 September. They also gave an average 12-month share price target of S$3.41, which represents a return potential of -3.1%.

The latest of these ratings came from Morgan Stanley analysts, who reiterated a &lsquo equal weightage/in-line&rsquo recommendation and target price of S$3.50 on 16 September.

UOB analyst K Ajith had a slightly more bullish price target of S$3.65 alongside a &lsquo hold&rsquo rating.

However, he wrote that he is not confident that borders will reopen by the end of 2020, and thus does not expect any improvement for SIA any time soon.

While SIA would theoretically be the most direct beneficiary of a Covid-19 vaccine, Ajith believes that &lsquo its financial position could possibly be severely weakened prior to a global distribution of vaccines&rsquo .

He further cautioned that SIA could potentially exhaust its S$8.8 billion in rights and convertible debt proceeds by end-March 2021, unless it manages to defer a large part of the S$2.0 billion flight advance payments.

He estimated that SIA would have at least S$6 billion more of payables due in the next six months, even on the assumption that its derivative liabilities diminish in value.

As previously reported, the carrier had already utilised half, or S$4.4 billion, of the funds raised.

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SATS (SGX: S58)

 

Latest share price: S$2.91

Average 12-month target price: S$2.99

Estimated return potential: 2.7%

Out of 10 brokers polled by Bloomberg, 4 have rated  SATS  a &lsquo hold&rsquo , 4 rated it &lsquo sell&rsquo and 2 rated it &lsquo buy&rsquo , as of 17 September.

The brokers also gave the flight services company an average 12-month share price target of S$2.99, which represents a return potential of 2.7%.

UOB&rsquo s Ajith has an above average target price of S$3.10 and &lsquo hold&rsquo rating for the stock.

Unlike SIA, he believes SATS will benefit directly from the development of a Covid-19 vaccine by early next year.

&lsquo Given Singapore&rsquo s status as a key trans-shipment hub, SATS is likely to play a significant role in the transportation and storage of vaccines to the Asia-Pacific region,&rsquo he wrote.

SATS&rsquo Indonesian associate PT JAS is also certified to handle pharmaceutical products, Ajith added.

Earlier this month, Bloomberg Intelligence analyst Denise Wong wrote that SATS could suffer more than S$100 million in operating losses during fiscal March 2021, with its aviation revenue expected to plunge by 60-70%.

&lsquo Passengers handled and in-flight meal sales may remain at 70% below a year ago in 2H (second half), yet a strong push into food trading and distribution could buttress up to half of food-solutions revenue,&rsquo she wrote.

Overall, she predicts that operating margin is poised to dive in the second half of 2020 due to lower utilisation of facilities and equipment and a shift in the sales mix, though aggressive cost cuts and government grants (such as Jobs Support Scheme) may blunt declines.

ST Engineering (SGX: S63)

 

Latest share price: S$3.35

Average 12-month target price: S$3.81

Estimated return potential: 13.7%

STE  has a majority rating of &lsquo buy&rsquo from 10 out of 13 analysts polled by Bloomberg.

The stock also has an average 12-month share price target of S$3.81 from the analysts, representing a 13.7% price upside.

JP Morgan analysts last month graded the stock &lsquo overweight&rsquo with an above-consensus target price of S$4.20.

Their bullish price case was predicated on the company&rsquo s &lsquo resilient&rsquo earnings in the first half of 2020, which resulted in interim dividends being maintained.

Analysts say they like STE for its strong order book, relative defensibility to Covid-19, and other growth initiatives remaining on track.

However, unlike SIA and SATS, STE has a more diversified portfolio, with the group deriving roughly one-third of its revenue from defense.

Thanks to this, analysts say the company is &lsquo well positioned to benefit from potentially higher defense spending globally in light of growing political uncertainties&rsquo .

Its aerospace segment, which contributed 44% of revenue in 2019, should also continue to grow despite near-term Covid-19 disruptions, driven by its acquisition of MRAS from GE in April 2019 and the ramp up of its PAX-to-freighter (PTF) conversion programmes, JP Morgan added.

UOB&rsquo s Ajith rated the STE stock a &lsquo hold&rsquo alongside a target price of S$3.60, stating that the company could benefit from higher maintenance works on return-to-service checks for grounded aircraft ahead of an anticipated traffic recovery.

Still, he noted that STE&rsquo s biggest aerospace exposure is in the US, where about 50% of aircraft is still grounded.