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

SIA ENGINEERING CO LTD (SGX:S59) | SGinvestors.io 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%)






LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 3.300 SAME 3.300



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