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


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.

Revenue squeezed

  • 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.

Margin affected by lower revenue

  • 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.

Firm demand for Rolls Royce and Pratt & Whitney engine repair

  • 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.

Strong cash but dividend cut on conservative ground

  • 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.

Maintain ADD as valuation is not expensive

  • 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 | 2018-11-09
SGX Stock Analyst Report ADD MAINTAIN ADD 3.11 DOWN 3.310