SIA Engineering - OCBC Investment 2019-02-11: Not A Smooth Ride

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Not A Smooth Ride

SIA ENGINEERING CO LTD (SGX:S59) saw a 5.6% y-o-y fall in revenue to S$255.9m and a 40.1% decrease in net profit to S$33.1m in 3QFY19. This brought 9MFY19 net profit to S$111.6m, accounting for 63% and 66% of ours and the street’s full year forecasts, respectively.

Operating profit of S$15.9m in the quarter was 15.4% lower y-o-y, on the back of lower revenue from lower airframe and fleet management activities. This was partially mitigated by higher line maintenance revenue.

SIA Engineering's poorer y-o-y performance was mainly due to one-off events from associated and JV companies –
1. a revision in fee structure of an engine shop in 2018 that evened out its revenue over the year instead of a lump sum adjustment in 3QFY18,
2. a forex adjustment made for the functional currency change of an associated company, and
3. a one-time tax charge booked by certain associated companies in 3QFY19.
These led to a 53% fall in share of profits from associates and JVs to S$19.2m in 3QFY19, compared to S$40.8m in 3QFY18.
However, if we were to look at a longer time frame, performance was actually not as poor – 9MFY19 share from associates and JVs amounted to S$81.6m vs. S$84.8m in 9MFY18.

Looking ahead, the group commented that the operating environment “remains challenging”. On its part, SIA Engineering will continue to focus on its transformation journey (may take two years from its commencement in Apr 2018) and investments in technologies, as well as manage its portfolio of JVs to drive sustainable growth.
Recall that SIA Engineering had earlier decreased its interim from S$0.04/share in 1H18 to S$0.03/share in 1H19, and we do not exclude the possibility of a cut in dividend during its 4QFY19 results.
Meanwhile, we see few catalysts for the stock, except for
1. less pricing pressure from airlines under a lower oil price environment, or
2. a possible privatisation by SINGAPORE AIRLINES LTD (SGX:C6L).
We adjust our estimates slightly lower and our fair value estimate slips from S$2.64 to S$2.47.

Low Pei Han CFA OCBC Investment Research | https://www.iocbc.com/ 2019-02-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.47 DOWN 2.640