SIA Engineering - CGS-CIMB Research 2018-11-09: Revenue Squeezed But Helped By Associates/ JVs

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Revenue Squeezed But Helped By Associates/ JVs

Fewer heavy checks caused 2Q19 net profit of S$37.9m (- 6% q-o-q, - 1% y-o-y) to miss our forecast.1HFY3/19 NP formed 44% of our FY19F and consensus.
The saving grace came from stronger engine repair from associates and JVs thanks to firm demand to rectify Trent 1000 and GP72000.
SIA Engineering declared S$0.03 interim DPS (1H18: S$0.04). Net cash at S$450m.
We cut FY19- 21 EPS forecasts by 10- 12%. Maintain ADD but lower Target Price to S$3.11.

SIA Engineering's 2Q19 revenue of S$251.3m (-9% y-o-y, -3% q-o-q) was 10% below our expectations. 1H19 revenue of S$509m made up 47% of our previous FY19F. Airframe and line maintenance revenue dipped 5% y-o-y to S$443m, affected by 31% drop in the number of C checks to 31 in 1H19 (1H18: 45).
Management blamed the de-leasing of several aircraft (including 5 A380s) as the reason why fewer C checks were performed. There was also scope of work that required some aircraft to be parked longer in the hangar that caused lower yield on manhours.
Going into 2H19, management sees similar weak trend for C checks. However, the number of flights handled grew 3% hoh to 75,783 in 1H19, in line with the strength seen in Changi Airport.

EBIT margin dipped from 6.5% in FY18 to 4.2% in 1H19. Negative jaw y-o-y but positive q-o-q as staff costs dipped 3% q-o-q and 6% y-o-y to S$120m.
Overall expenses were down by 6% y-o-y and 3% q-o-q to S$240m, but were still not enough to offset the lower revenue impact.

The saving grace came from stronger engine repair from associates and JVs thanks to firm demand to rectify Trent 1000 engines for Rolls Royce, which is sustainable in the next 1-2 years. Pratt & Whitney has also started to see GP72000 (alternative engine for A380) coming in 2Q19.
Going into 2019, pipeline for Pratt & Whitney GTF engines (power A320/A321neo) are also firm, to cushion the gradual phase-out of B747 aircraft.

Net cash stood at S$888m at end-8QFY88. However, interim DPS is lower y-o-y to S$8.88 on conservative grounds.
We take this cue that 8H88 core airframe business may still be weak but the upside is stronger-than-expected contribution from associates/JV.

We lower our revenue assumptions and subsequently, cut our FY88-88F EPS forecasts by 88-88%. We also lower our DPS to S$8.88.
Our Target Price is still based on DCF (WACC: 8.8%), or implied 88.8x CY88F P/E and below average trading band of 88.8x.
Catalysts include stronger-than-expected engine repair in associates/JVs or corporation action from parent.
Risks include sudden plunge in aviation sector.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-09

SGX Stock Analyst Report ADD MAINTAIN ADD 3.11 DOWN 3.310