Why SIA Engineering is defying analyst price targets

• SIA Engineering’s share price is up nearly 20% this month
• The stock, alongside the wider market, soared as sentiments grew bullish at the possibility of a Covid-19 vaccine
• Nevertheless, analysts slashed their ratings and price targets earlier this month following the company’s ‘worse than expected’ first half results

SIA Engineering share price: What’s the latest?

SIA Engineering’s share price has spiked up nearly 20%, since the company reported its first half earnings for its 2020-2021 financial year a month ago.

The aircraft maintenance company’s stock is trading at S$2 a share as at 11:45 SGT on Monday 30 November 2020, up from S$1.60 earlier this month.

Singapore shares have rallied across the board since the start of November, thanks to the release of positive Covid-19 vaccine trial data globally.

The broader Straits Times Index (STI) benchmark - which tracks the 30 largest listings on the Singapore Exchange (SGX) - rose as much as 19% during the same period.

Meanwhile, SIA Engineering parent company SIA Group’s share price soared 11% last week to a six-month high amidst the bullishness.

SIA Engineering’s first half earnings: key highlights

Earlier this month, SIA Engineering posted a net loss of S$19 million for the first half ended 30 September 2020, representing a decline of S$106.6 million year-on-year.

At the top line, the group recorded a revenue of S$223 million for this half, a decrease of S$289.7 million (-56.5%) compared to the same period last year due to a reduction in its business activities as a result of low flight activities and massive grounding of aircraft.

With cost measures implemented and grants from government support schemes, group expenditure was also down but at a lower rate. Group expenditure at S$250.2 million, was down S$225.2 million (-47.4%) with reduction mainly in manpower costs and subcontract costs.

Consequently, SIA Engineering incurred a group operating loss of S$27.2 million, as compared to an operating profit of S$37.3 million in the same period a year ago.

Why analysts are ‘now less convinced’ of the stock

The SIA Engineering stock currently has a 12-month share target price of S$2.13 from analysts polled by Refinitiv.

DBS analysts Suvro Sarkar and Jason Sum recently downgraded their rating on the aviation stock to ‘hold’ from ‘buy’, alongside a lower target price of S$1.60 from S$2.40 previously.

Their research note was posted after the company had reported its first half financial report, which the analysts wrote was ‘worse than expected’.

In it, Sarkar and Sum also cited a slower-than-anticipated recovery rate for SIA Engineering’s maintenance, repair and overhaul business as a key factor for their price case, with international air traffic ‘likely to stay subdued for now’.

The lack of an interim dividend payout also reduces the stock’s attractiveness in their opinion.

Meanwhile, UOB analyst K Ajith was more bearish, slashing his rating on the stock to a ‘sell’ and target price to S$1.52.

He wrote in a note: ‘We are now less convinced of its ability to make a turnaround post-Covid-19, and believe that stock price is likely to head towards book value if earnings do not recover in FY22.’

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