SIA Engineering - Maybank Kim Eng 2019-05-13: On A Slow Flight To Stability


SIA Engineering - On A Slow Flight To Stability

A beat; but near-term challenges linger

  • SIA ENGINEERING CO LTD (SGX:S59)'s 4Q19/FY19 PATMI was higher than we expected and a small beat versus the street as well. The beat was mainly driven by better-than-expected cost management and stronger Associate/JV income.
  • While the MRO environment remains challenging in the near term, SIA Engineering’s transformation initiatives appear to be achieving some results.
  • Our FY20F-21F PATMI forecasts have moved very marginally by +/-1% from tweaks to interest, depreciation and tax rates; our SGD2.85 Target Price based on DCF remains unchanged. BUY.

Associates/JVs, cost control offset revenue pressure

  • SIA Engineering's 4Q19 core PATMI of SGD49.4m was c.SGD15m ahead of our forecast resulting in FY19 PATMI c.10% higher than what we expected.
  • Stronger cost control drove EBITDA margin expansion while 4Q associate & JV profit also exceeded expectations by engine services associate Eagle Services Asia. This helped more than offset the soft FY19 consolidated revenues which fell c.7% y-o-y reflecting continued pressure on airframe overhaul and fleet management segments; a small positive on this front is that SIA Engineering seems to have seen c.1.5ppt line maintenance market share gain in 2H19 at its Changi home base to c.80%.

Boeing’s issues may pose near term challenges

  • Management outlook for the year appears muted given lighter MRO workload required in new generation aircraft. Also possibly compounding this could be the recent grounding of six B737MAX and two B787—10 aircraft by its customers Silkair and SINGAPORE AIRLINES LTD (SGX:C6L) which may potentially prolong the maintenance cycle for the rest of their fleets.

Transformation initiatives are beginning to show

  • Management is taking measures to grow scale outside Singapore, as well as control costs to ‘right-size’ the business. These efforts have driven some EBITDA margin improvements for three successive quarters now.
  • SIA Engineering is also investing in new manufacturing technology, inflight entertainment and connectivity systems which should start contributing over 12-15 months. A material aviation industry downturn or a longer-than-expected transformation timeline are the key risks to our outlook.
  • See attached PDF report for the recap of our investment case.

SIA Engineering's 4Q/FY19 results highlights and updates

  • SIA Engineering's 4Q19 core PATMI up c.14% y-o-y driven by lower material and subcontract costs and stronger associate & JV profit (driven mainly by engine centres while component centre profits declined marginally y-o-y). The 49% q-o-q growth level is somewhat skewed by tax adjustments at the parent company level of one of its associates which took place in the prior quarter.
  • Fleet management saw a drop of around 30 aircraft to 82 aircraft during 2H19 from the restructuring of the business and creation of its 49% joint-venture with Boeing Asia Pacific Aviation Services. Fleet management for Boeing aircraft will be undertaken by this entity going forward and be associate-accounted. Airbus aircraft fleet management will continue to be consolidated.
  • EBITDA margin of 12.7% was up 130bps q-o-q and represents the third sequential quarter of improvement.
  • Final dividend declared at 8cts/share bringing FY19 dividend to 11cts/share versus FY18 dividend of 13cts/share. FY19 pay-out ratio at 77% versus FY18 at 87%. See SIA Engineering's dividend history.
  • PPE capex expected to increase y-o-y in FY20F to levels of the few years (i.e. cSGD35-45m) prior to FY19 which was unusually low at SGD25m.
  • New associate investment in NokAir Scoot venture for line maintenance in Thailand holds growth promise as the country has a fast-growing LCC segment. Operations are expected to commence during the current financial year initially at Don Muang Airport in Bangkok.
  • Cabin maintenance venture Additive Flight Solutions announced last year has commenced operations already but will likely take a year or so for contribution to be meaningful.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 2.850 SAME 2.850