SIA Engineering - DBS Research 2018-07-20: Higher Workload Ahead

SIA Engineering - DBS Group Research Research 2018-07-20: Higher Workload Ahead SIA ENGINEERING CO LTD SGX:S59

SIA Engineering - Higher Workload Ahead

  • SIA Engineering’s (SIE) 1QFY19 net profit of S$40.5m in line with estimates. 
  • Core operating margin disappoints at 4% owing to lower base maintenance revenues in the quarter. 
  • This was offset at the net level by better contribution from JV/associates as engine shop upswing continues. 
  • Better operating performance expected in coming quarters as A380 workload increases.

Maintain BUY as there are more bright spots ahead.

  • SIA Engineering’s (SIE) forward valuation ratios continue to be below -1SD levels, which we view as a good investment opportunity, as there are some positive earnings drivers ahead:
    1. an upswing in the engine MRO cycle, with workload boosted further by visits from the problematic Trent 1000 engines (whose repair campaign could last up to 2-3 years);
    2. cabin retrofitting work on Singapore Airlines' (SIA) legacy A380s which is expected to come in at the end of 2018;
    3. the new GE engine collaboration which should be operational in 2019 or early 2020 with the potential to be a large contributor to JV/associate income; and
    4. expansion of the line maintenance segment in Japan (with a view towards other countries as well) which could help drive the top line.
  • 1QFY19 results were in line, with higher JV/associate profits offsetting lower core operating margins. We maintain our BUY call with a Target Price of S$3.92; together with a dividend yield of 27%. 

Downside risks are limited.

  • The adverse effect on the heavy maintenance segment of longer check intervals and lower check content of newer generation aircraft should be mostly offset by a growing fleet size, especially in Asia Pacific. Also, while the fleet management business is facing headwinds, with the fleet having already shrunk from 193 aircraft at its peak to the current 89 (with 2H18 actually recording a h-o-h increase of five aircraft under management), the worst could be over for that segment. 


  • Our Target Price of S$3.92 is based on a blended valuation framework (PE, EV/EBITDA, dividend yield, and DCF), and includes a 20% M&A/privatisation premium. 

Key Risks to Our View: 

  • Intensifying competition could lead to renewed stress on the margin front. A weaker-than-expected fleet management segment from lower economies of scale is another risk. 
  • Upside risk exists in the form of potential privatisation/M&A. 

WHAT’S NEW - JV / associates upswing continues to drive performance

Net profit in line but operating margin weakness masked by better JV/associate line.

  • 1QFY19 net profit was in line with expectations at FY18 average EBIT margin of 7%. At the net level, this was offset by higher contributions from JV/ associate line.

Associate and JV profits rise; engine shops performing well.

  • Associate and JV profits of S$32.4m in 1QFY19 were better than expected, up 54% y-o-y and 30% q-o-q and lends further credence to our belief that we are seeing signs of an engine MRO cycle upswing.
  • Overall, the engine shops should continue doing well with an upswing in the engine MRO cycle – SIA Engineering and competitors have mentioned engine shops operating at high utilisation rates – as well as some support from workload on the problematic Trent 1000 engines. The GE engine facility, which we think is likely to be operational in 2019 or early 2020, will be the next leg up for growth in terms of engine shop profits.

Strong balance sheet; headroom for M&A and productivity improvements.

  • Operating cash flow was strong in 1Q-FY19, atmore than S$570m in cash/short-term deposits on hand. This gives headroom for M&A and/or spending on productivity improvements.

Suvro Sarkar DBS Group Research Research | https://www.dbsvickers.com/ 2018-07-20
SGX Stock Analyst Report BUY Maintain BUY 3.920 Same 3.920