SIA Engineering - CGS-CIMB Research 2019-12-09: Cheaper Than Peers

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SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Cheaper Than Peers

• Transformation efforts are paying off for SIA Engineering as its EBITDA margin rose for the fifth quarter in a row in its recent 2Q3/FY20 results.
• We like SIA Engineering for its M&A angle, margin expansion, decent yield of 4% and strong net cash pile of S$488m.
• SIA Engineering’s valuation, at 2 s.d. below its 7-year mean, is cheaper than peer STE (5x CY19 P/BV).
• Maintain ADD with a higher DCF-based Target Price of S$3.30.

EBITDA margin up for five consecutive quarters to 15.2%

• SIA ENGINEERING (SGX:S59)’s group EBITDA margin for 2QFY3/20 was a positive surprise at 15.2%, up from a low of 9.3% in 1Q19. A positive jaws ratio was achieved as 1HFY20 revenue rose 1% y-o-y to S$513m while opex fell 2% y-o-y to S$475m on good control of staff costs (S$249m).
• Management shared during the analyst briefing that transformation efforts implemented since 2016 started 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) has led to a visible increase in operating profits of the airframe, overhaul and line maintenance division. The division’s 1H20 operating margin almost doubled to 8.6% (1HFY19: 4.6%).
• We think the upward trend is likely to continue as 2Hs are generally stronger and given yield improvement from transformation efforts.

Lion’s share in Changi airport

• SIA Engineering handled more flights than competitors in Changi. The 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

• We expect Eagle Services’s ramped-up workshop for GTF engines (powering the new A320neo aircraft) to improve its operating leverage as more engine visits start to stream in from CY20; the A320neo is reaching its 4-5 year lifecycle. Profit contribution from the other JV, SAESL, should remain steady with rectification work for Trent 1000 engines.

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

• SIA Engineering’s net cash position as at end-1H20 was S$488m (up from S$434m in 1H19). The recovery in its operations should enable the company to bump up its final dividend to 9 Scts/share (from 8 Scts/share in FY19), implying a dividend yield of c.4% based on a total dividend per share of 12 Scts for FY20 at the current share price.
• A few things to look forward to for SIE include
  1. margin expansion,
  2. the 2020 Airshow as SIA Engineering steps up services, such as refuelling, towing and maintenance,
  3. stronger associates/JVs as operating leverage improves,
  4. the M&A angle, if SIA privatises/divests, and
  5. higher dividends. A downside risk is a slowdown in the aviation industry.
• See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09

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