SIA Engineering - OCBC Investment 2018-11-09: Soft 2QFY19

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SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Soft 2QFY19

• Results slightly below.
• Time needed for transformation.
• Lower interim div of 3 cts.

2QFY19 results slightly below

• SIA Engineering Company (SIAEC) registered an 8.5% y-o-y fall in revenue to S$251.3m in 2QFY19, mainly due to lower airframe and fleet management revenue.
• Operating profit was 43.8% lower at S$11.3m while share of profits of associates/JVs rose 31% to S$30.0m. Net profit was 1.6% y-o-y lower at S$38.0m in the quarter, bringing 1HFY19 net profit to S$78.5m (+4.2%) or 45% of our full year figure.
• We judge this to be slightly below our expectations.

Aircraft spending more time in hangars

• Revenue from airframe and line maintenance was 6% lower y-o-y S$442.6m in 1HFY19, while revenue from the fleet management programme (88 aircraft currently) was 18% lower at S$50.8m. Revenue from engines and components was 18% higher at S$15.6m.
• In terms of operating profit, airframe and line maintenance saw a 43% y-o-y fall to S$22.6m while engines and components had a S$1.1m operating loss.
• There were fewer “C” checks maintenance in the Singapore base in 1HFY19, though the number of “A” checks (lighter than “C”) was higher. The number of checks that can be undertaken is also constrained by hangar capacity, and should aircraft spend a longer time parked in the hangar, it would also mean missed opportunities to undertake maintenance work for other aircraft.

Time needed for full benefits from transformation programme

• SIA Engineering started on a transformation journey in Apr this year with the progressive implementation of measures to increase productivity, reduce costs and upgrade capabilities. Time will be needed to materialise the full benefits of this, and we estimate this may take up to two years.

Lower interim div of S$0.03/share

• Despite the 4.2% y-o-y increase in 1HFY19 net profit, SIA Engineering has declared an interim dividend of S$0.03/share which is lower than last year’s S$0.04/share. Should this trend continue, it could either mean that the outlook may be either more negative or management is conserving cash for future investments or acquisitions.
• Meanwhile, we have lowered our assumptions and updated the cost of equity with increased market volatility, and our Fair Value estimate drops to S$3.03.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2018-11-09

SGX Stock Analyst Report HOLD DOWNGRADE BUY 3.03 DOWN 3.700