SIA Engineering - CGS-CIMB Research 2019-07-05: Too Fast Too Furious


SIA Engineering - Too Fast Too Furious

Too fast too furious

SIA balance sheet is stretched with impending aircraft delivery

  • With 28 aircraft due Raymond Yap forecast Singapore Airlines’s net gearing rising from 28% at end-FY3/19 to 73% at end-FY20F, as total borrowings could double to c.S$12.2bn (FY19: S$6.7bn). Singapore Airlines ended FY3 S$2.1bn. We believe it is better strategy for Singapore Airlinesto conserve cash for now.

SIA has enough issues on hand

  • We think management and time with issues such as
    1. yield pressure long-haul flights,
    2. weakness the cargo business,
    3. competition the Chinese, and
    4. higher oil.
  • SIA Engineering has its own issues to deal with, including lower engine and component maintenance, as the industry is being encroached by OEMS in addition to stronger airframe composites (longer interval for heavy checks).

Positive for SIA Engineering’s share price and minimal earnings accretion to SIA

  • Our Target Price implies 21x CY 21F P/E or 2.2x FY19F P/BV, in line with its 1021x.
  • SIA Engineering had a net cash of S$50/19. If a privatisation takes place at our Target Price, it would cost Singapore Airlines c.S$655m in cash outlay for the deal, after netting interests (22%) portion of SIA Engineering’s cash of S$520m.
  • SIA Engineering and its associates/JVs generate 30/70% of their revenue from Singapore Airlines and non Singapore Airlines customers. The consolidation of the MI portion of non-Singapore Airlines earnings to Singapore Airlines could add minimal or c.3% to its earnings (before interest costs). We think the risk-reward is not attractive and efforts to privatise can be better channeled elsewhere.

Maintain ADD and unchanged Target Price of S$3.11

  • Given the sharp SIA Engineering’s share price gains, we think optimism of the ‘event-driven’ angle has been priced in. We keep our ADD call still based on DCF (LTG: 0.3%, WACC 8%)
  • A sudden slowdown of the economy and aviation industry are downside risks, while stronger-than-expected engine repair from its associates/JVs are upside risks.

Could this be another Keppel/KTT?

No difference to SIA Engineering’s operations

  • SIA Engineering has been a key wingman for Singapore Airlines' new generation aircraft expansion plan. SIA Engineering has been facing pressure from OEMs encroaching into third-party territory and the privatisation may not enhance its position.
  • Conversely, it may not necessarily change the perception of independence from parent airline group to win new contracts because SIA Engineering has an established track record as a choice engine MRO provider given the long-term tie-ups with Rolls Royce and Pratt & Whitney. Therefore, it makes no difference to SIA Engineering’s operations with or without privatisation, in our view.

Earnings accretion minimal to SIA

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-07-05
SGX Stock Analyst Report ADD MAINTAIN ADD 3.110 SAME 3.110