Broker's take: OCBC downgrades SIA Engineering to 'sell' as virus weighs on travel demand

OCBC Investment Research has downgraded SIA Engineering Company (SIAEC) to "sell" and lowered its fair value estimate from S$2.86 to S$2.41, citing the effect that the novel coronavirus outbreak is likely to have on near-term demand for air travel.

As at 10.55am, shares in the company, which provides aircraft maintenance, repair and overhaul services, were trading S$0.01 or 0.4 per cent lower at S$2.58, after some 308,000 shares changed hands.

During the Sars (severe acute respiratory syndrome) epidemic in 2003, visitor arrivals to Singapore fell 19 per cent year on year (y-o-y) to 6.1 million, while the number of incoming flights declined 12 per cent y-o-y.

As a result of the weak travel demand then, airlines scaled back flights and grounded aircraft which in turn weighed heavily on SIA Engineering's airframe business, which saw a 21 per cent y-o-y drop in FY2003 revenue, as well as the line maintenance and technical ground handling business, which posted a 25 per cent y-o-y decline in FY2003 revenue, the OCBC Investment Research team wrote in a Tuesday report.

While travel demand recovered to pre-Sars level in the fourth quarter of 2003, there was a lag of three to six months before the tailwinds of recovery filtered down to SIA Engineering's airframe maintenance and component overhaul, the research house added.

The hit to sentiment during the Sars outbreak saw SIA Engineering shares dive 27 per cent over a five-month period to reach a trough in late April 2003. The counter then took six months to recover to its pre-Sars trading price.

Taking into account the potential impact of the novel coronavirus, OCBC lowered its revenue forecasts for the company's airframe and line maintenance segment, cutting it by 10 per cent for FY2020 and by 15 per cent for FY2021.

Last Friday, SIA Engineering posted a 63.1 per cent rise in its third-quarter net profit to S$54 million, beating forecasts by both OCBC and Bloomberg.

The strong bottomline was largely due to tax provisions and the stronger performance of its parent - national carrier Singapore Airlines - which partially offset weaker performance by SIA Engineering's subsidiaries.

Topline edged down 1.5 per cent yoy to S$252.1 million for Q3, mainly due to a lower contribution from its airframe and line maintenance business.