SIA Engineering - CGS-CIMB Research 2019-11-04: Transforming From Glory To Glory


SIA Engineering - Transforming From Glory To Glory

  • SIA Engineering’s earnings beat expectations for the first time since FY18 as transformation efforts paid off. EBITDA margin rose for fifth quarter in a row.
  • SIA Engineering 1HFY20 net profit of S$87.6m was above at 53%/52% of our and consensus FY20F. We up our FY20-22F EPS by 4% to reflect better margins.
  • We like SIA Engineering for M&A angle, margin expansion, decent yield of 4% and strong net cash pile of S$488m. Retain ADD with a higher DCF-based Target Price of S$3.30. See SIA Engineering Share Price; SIA Engineering Target Price.

EBITDA margin up for five consecutive quarters to 15.2%

  • SIA ENGINEERING (SGX:S59) group EBITDA margin for 2QFY3/20 was a positive surprise at 15.2% from a low of 9.3% in 1Q19. There was a positive jaw achieved as 1HFY20 revenue rose 1% y-o-y to S$513m while opex was down 2% y-o-y to S$475m on good control of staff costs (S$249m). See SIA Engineering Announcements.
  • Management shared during the analyst briefing that transformation efforts implemented since 2016 are starting to pay off. Process re-engineering to improve throughput (fewer man-hours required for tasks), as well as investment in technology and innovation (e.g. data analytics, automated guided vehicle, pneumatic tube systems) have led to visible increase in operating profits of airframe, overhaul and line maintenance division.
  • 1H20 operating margin for the division almost doubled to 8.6% (1HFY19: 4.6%). We think the upward trend is likely to continue as 2Hs are generally stronger and yield improvement from transformation efforts.

Lion’s share in Changi airport

  • SIA Engineering handled more flights than competitors in Changi. Total number of flights handled in Changi was down by an average of 1.4% y-o-y in Apr-Sep 19 but SIA Engineering’s flights handled grew by c.3% y-o-y and 1% hoh.
  • There have been several new contracts secured including Vistara, Jeju Air and AirAsia X.

Profit from associates and JVs ramping up

  • Profit contribution from associates recovered from S$15m in 1QFY20 to S$18m in 2QFY20 as Eagle Services ramped up its workshop in preparation of GTF engines (powering the new A320neo aircraft). Most of the ramp-up costs were booked in 1QFY20. Eagle Services had started to take on light checks for GTF engines since Jan CY19.
  • We expect the operating leverage to gradually improve as more engine visits start to stream in from CY20 as A320neo reaches its 4-5 year lifecycle. Profit contribution from JVs was steady with continuous work for Trent 1000 engines rectification.

Maintain ADD with a higher Target Price of S$3.30 (WACC: 7.3%)

  • SIA Engineering declared interim DPS of S$0.03 (flat y-o-y). On the back of higher EPS, we conservatively lift our DPS expectations to S$0.115 for FY20F based on 75% payout (FY19: 77% payout). See SIA Engineering Dividend History.
  • A few things to look forward to include
    1. margin expansion,
    2. 2020 Airshow as SIA Engineering steps up services such as refueling, towing, maintenance,
    3. stronger associates/JVs as operating leverage improves,
    4. M&A story, if Singapore Airlines (SGX:C6L) privatises/divests, and
    5. higher dividend.
  • Downside risk is slowdown in aviation industry.

LIM Siew Khee CGS-CIMB Research | 2019-11-04
SGX Stock Analyst Report ADD MAINTAIN ADD 3.30 UP 3.110