SIA Engineering - UOB Kay Hian 2019-02-11: 3QFY19 Another Set Of Disappointing Results As Associate & JV Income Falters; Downgrade To HOLD

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - 3QFY19: Another Set Of Disappointing Results As Associate & JV Income Falters; Downgrade To HOLD

SIA Engineering delivered yet another disappointing set of results. While top-line did not decline as significantly as 2QFY19’s -8.5% y-o-y, net profit still fell 40.1% y-o-y due to a S$20.9m one-off charge for associates and JVs. Even excluding that, core net profit fell 2.4% y-o-y.
That said, we are most disappointed by the lack of guidance on the engine JVs, especially given that earnings from the segment rose 90% y-o-y in 1HFY19.
Downgrade to HOLD and cut target price to S$2.55. Entry price: S$2.10.

Even excluding that, SIA ENGINEERING CO LTD (SGX:S59)’s earnings were substantially below our expectation, amounting to 68% of our initial full-year estimate of S$194.5m and 78.4% of street’s full-year estimate.
Revenue continued to deteriorate for the fifth consecutive quarter, albeit at a lower rate than 2QFY19’s 8.5% decline.
SIA Engineering indicated that the decline was due to lower airframe and fleet management revenue, which offset the increase in line maintenance revenue. Staff cost also fell by just 1% y-o-y, vs the 5.6% y-o-y decline in top-line, suggesting a relative fixed labour cost structure.

We had earlier opined that SIA Engineering should benefit from higher engine checks, particularly from the Rolls Royce Trent 1000 engines. This wasn’t the case for 3QFY19, as even after excluding the S$20.9m one-off charge, JV & associate income fell 1.7% y-o-y. This stands in contrast to 1HFY19 when earnings from engine checks for associate and JVs rose 90% y-o-y. While this could be due to a delay in such checks, SIA Engineering did not indicate as such.
SIA Engineering indicated that the S$20.9m in one-off charge was due to:
1. a revision in the 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. forex adjustment made for the functional currency change of an associate company; and
3. a one-off tax charge booked by certain associate companies in 3QFY19.

Operating cash flow before working capital changes fell 9.2% y-o-y in 3QFY19, while investing cash flow rose 100% y-o-y due to lower capex and a 58% y-o-y rise in dividends from associates & JVs. This stands in contrast to the 53% y-o-y decline in reported profits from the segment.

While we have assumed that associate and JV earnings will rise in 4QFY19 (+23.2% y-o-y) and FY20 (+23% y-o-y), we are now less confident due to the lack of guidance.
Meanwhile, we are concerned about the continued deterioration in the airframe maintenance business as well as the relatively fixed structure of staff costs.

We slash our FY19 net profit estimate by 19% after factoring in a S$20.9m charge for the year along with a 7.5% reduction in associate and JV income.
Our FY20 net profit estimate is also reduced by 14% due to lower estimate for associate and JV income.

We continue to value SIA Engineering using DCF on recurring free cash flow (inclusive of dividends from associates). However, we lower our terminal growth rate from 1.1% to 1.0% and raise our WACC estimate from 6.3% to 6.6% to factor in the higher earnings volatility.
Recommended entry price is S$2.10, or 15x FY19F PE.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-02-11

SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.55 DOWN 2.700