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

SIA ENGINEERING CO LTD (SGX:S59)

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.

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.

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.

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.

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 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 | https://www.dbsvickers.com/ 2019-07-29

SGX Stock Analyst Report BUY MAINTAIN BUY 3.010 SAME 3.010