SIA Engineering - DBS Research 2019-07-29: Encouraging Margin Trends


SIA Engineering - Encouraging Margin Trends

  • SIA ENGINEERING (SGX:S59)'s 1QFY20 earnings in line with expectations.
  • Core EBIT margins holding up better than expected, could prompt earnings upgrades if sustained.
  • Privatisation prospects back in focus recently, should support share price momentum.
  • Maintain BUY with Target Price of S$3.01.

What’s New

Net profit in line.

  • SIA ENGINEERING (SGX:S59)'s 1QFY20 net profit of S$41.6m (+2.7% y-o-y) was largely in line, forming 23% of our full-year estimate, as higher core operating profits tempered lower than expected contributions from its associates and JVs. Group revenue of S$258.1m (flat y-o-y) was also in line with our expectation, forming 25.5% of our full-year estimate.

EBIT margins holding up.

  • Interestingly, SIA Engineering’s core EBIT surpassed our expectation, at S$17.7m (+74% y-o-y), driven by healthy EBIT margin of 6.9% (vs 4.0% in 1Q19). This marks the third consecutive quarter of SIA Engineering’s core EBIT margin swinging back to its historical 6-8% range (vs 4-5% in 1HFY19), suggesting that the group’s cost cutting and productivity initiatives are starting to bear fruit. However, sustainability is key.

One-off costs affected assoc/ JV contributions.

  • Associate and JV profits disappointingly fell to S$26.0m (-20% y-o-y and q-o-q) in 1Q2FY20, owing to upgrading expenses incurred by an engine centre (likely Eagle Services Asia) to gear up for new engine capabilities (new Pratt & Whitney Turbofan engines).
  • Barring the one-time expenses, SIA Engineering’s contributions from associates and JVs would have been on-par y-o-y.
  • Going forward, we anticipate associate/JV contributions to remain robust, underpinned by a recovery in the engine MRO cycle, and commencement of support for new engine types.

Balance sheet remains strong.

  • Operating cash flows of S$58.6m was on par with the previous year, while the SIA Engineering’s net cash position improved to S$576m as at end 1Q20 from S$502m as at end 4Q19.

We maintain our BUY call

  • We maintain our BUY call on SIA Engineering with a Target Price of S$3.01, after factoring in privatisation premium. We have highlighted the privatisation prospects in our recent report on the Singapore Airlines Group, “No smoke without fire”.
  • While potential privatisation by parent SIA remains a key catalyst for the SIA Engineering stock, sustained improvement in operating performance will also help boost investor confidence.
  • Valuations are still close to historical lows, at < 17x forward PE, with an attractive dividend yield of about 4.5%, hence downside risks are limited.

Suvro Sarkar DBS Group Research | Singapore Research Team DBS Research | 2019-07-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.010 SAME 3.010