SIA Engineering - CGS-CIMB Research 2019-05-13: Cash & Valuations


SIA Engineering - Cash & Valuations

  • Key investment propositions in SIA ENGINEERING CO LTD (SGX:S59) are its valuation at -1 s.d. of its 10-year mean at 16x CY20F P/E and strong balance sheet of c.S$500m net cash.
  • SIA Engineering's 4Q19 net profit of S$49.2m was S$2m or 5% ahead of our expectations thanks to stronger revenue from airframe. FY19 was 2% above our forecast.
  • Maintain ADD with a S$3.11 Target Price.
  • Key catalysts for the stock are stronger-than-expected engine visits from its associates/ JVs.

More checks in 2HFY3/19

  • Revenue from airframe & line maintenance grew 1% h-o-h to S$498m with more checks performed in Singapore. There were 40 C checks done in 2H19 compared to 31 in 1H19. A checks also grew 9% h-o-h to 243 vs. 223 in 1H19. The h-o-h improvement in checks came from fewer de-leased aircraft checks performed.
  • Engine and fleet management revenue however dipped 11% and 3% hoh respectively. Both account for only 12% in total of SIA Engineering’s revenue.

Transformation helps to improve margins

  • Airframe & line maintenance operating margin improved h-o-h to 6.9%, thanks to shorter turnaround time, partially due to fewer de-leased aircraft which required more work as well as some fruits of transformation efforts to improve yield. Management hopes to sustain the margin trend ahead.
  • Engine & component remained challenging with operating losses widened to S$3m in FY19 vs. –S$1.6m in FY18.
  • Fleet management (FMP) is profitable but still requires more scale to see meaningful contribution. After the novation of contracts to Boeing Asia Pacific Aviation Services (BAPAS) of all the Boeing fleet, SIA Engineering only focused on Airbus 320 fleet for FMP. There are 82 aircraft on FMP.

Associates and JVs volume was sustained

  • Profit from associates grew 132% q-o-q and 34% y-o-y to S$22m with the absence of one-off tax charge adjustment in 3Q19 to prevailing tax rate for some associates. Workshop visits for Pratt & Whitney continued to be sustained by Pratt 4000 engines. JV’s profit contribution of S$10m (+4% q-o-q, +10% y-o-y) was mainly from rectification work for Trent 1000, which is likely to last for one more year.
  • There was also some work for Trent 1000 TEN engines that powered B787-10 fleet which faced premature blade deterioration on the engines. Management expects the associates and JVs workshop volume (read profit of c. S$30m- 32m per quarter) to be sustainable in the next 12 months.

Net cash and dividend of 79% payout, 4.4% yield

  • Final DPS of S$0.08 was declared, bringing total DPS to S$0.11 or 79% payout. This translates into a yield of 4.4% % at current SIA Engineering share price.
  • SIA Engineering's net cash stood at S$502.3m at end-FY19. We keep our EPS forecasts and Target Price unchanged at S$3.11, still based on DCF (long-term growth of 0.3%, WACC: 7.1%) or implied CY20F P/E of 20.7x (in line with 10-year average of 21x).
  • Key risk is sudden slowdown in global aviation.

LIM Siew Khee CGS-CIMB Research | 2019-05-13
SGX Stock Analyst Report ADD MAINTAIN ADD 3.110 SAME 3.110