SIA Engineering 1QFY20 - UOB Kay Hian 2019-07-29: Earnings In Line; Top-line Growth Turns Positive After 6 Quarters Of Decline

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering 1QFY20 - Earnings In Line; Top-line Growth Turns Positive After 6 Quarters Of Decline

SIA Engineering’s 1QFY20 net profit is in line with our expectations, up 2.7% y-o-y. A 21% y-o-y reduction in material costs and lower company accommodation cost led to a 74% y-o-y rise in operating profit.
Meanwhile, associate and JV earnings fell due to an 18% y-o-y decline in earnings from the engine segment.
Maintain HOLD and target price of S$2.55.
Suggested entry level: S$2.40.

SIA ENGINEERING CO LTD (SGX:S59) managed to record the first quarterly gain in top-line in six quarters. We had earlier estimated SIA Engineering could report 0-5% y-o-y growth in net profit, underpinned by higher operating profit. This was within the said range and as it turned out, operating profit rose 73% y-o-y.
The positive jaws came about due to a reduction in material costs (-21% y-o-y), staff costs (-0.4% y-o-y) and accommodation costs (-48% y-o-y). 1QFY20 net profit amounted to 25% of our and consensus full-year estimates.
SIA Engineering generated S$37.8m in operating cash flow before working capital changes, generating a decent margin of 14.6% on revenue.

The 20% y-o-y decline was due to an 18% y-o-y decline in earnings from engine JVs which faced higher opex. The repair and overhaul segment under the JV & associates recorded a loss of S$0.7m. Dividends from JV and associates fell 13% y-o-y, but dividend payout amounted to 100%.
SIA Engineering incorporated lease accounting, which led to off-balance operating lease liabilities being recognised as right of use assets and lease liabilities of S$102m and S$101.7m respectively. This also led to higher D&A and finance charges.

SIA Engineering is seeing improvement in “manpower utilisation, productivity and turnaround time from transformation initiatives and adoption of technologies”. Even so, SIA Engineering continues to guide for a challenging environment.

We are impressed by the quality of earnings, mainly the flat top-line, which was admirable given that flight movements at Changi fell 1.7% y-o-y for the quarter. This could have impacted line maintenance revenue and earnings but we reckon that overseas line maintenance ventures could have aided top-line growth.
Cost control was also impressive. That said, we still believe SIA Engineering is operating in an environment with increasing competition. Thailand is looking to set up an maintenance, repair and overhaul (MRO) centre and has partnered established OEMs and offered attractive tax breaks. This poses a challenge to Singapore-based MROs.
In addition, the continued grounding of the B737 Max could eventually lead to lower line maintenance revenue.

No change to our earnings estimates. We have yet to incorporate SFRS 16 lease accounting into our earnings model but we do not anticipate significant changes.

We continue to value SIA Engineering using DCF on recurring free cash flow (inclusive of dividends from associates). At our fair value, SIA Engineering would be trading at 17x FY20F PE.
Recommended entry price is S$2.40.

Improving flight arrivals, continued reduction in staff and other related costs.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-07-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.550 SAME 2.550