SIA Engineering - OCBC Investment 2020-02-11: Coronavirus Casts Shadow Over Travel Demand

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Coronavirus Casts Shadow Over Travel Demand

SIA Engineering (SGX:S59)’s 3QFY20 results came in above Bloomberg’s consensus and our forecasts. PATMI was up 63.1% y-o-y to S$54.0m, thanks to tax provisions and stronger performance by the parent company, and partially offset by weaker performance by the subsidiary companies. Revenue was down 1.5% y-o-y to S$252.1m, mainly due to lower contribution from the airframe and line maintenance segment (-S$3.9m).
3QFY20 expenditure fell 1.7% y-o-y to S$236.0m on the back of lower material expenses. Share of profits from associated and joint venture companies saw a substantial increase of 106.3% y-o-y, boosted by the one-off writeback of tax provisions following the confirmation of tax concession granted for certain engine and component centres.
Stripping out the impact of tax provisions, share of profits from associated and JVs would have been stable.

With the outbreak of coronavirus, sentiment turns cautious and we are likely to see a rapid decline in air travel demand. Taking SARS as an example, visitor arrivals to Singapore fell 19.0% y-o-y from 7.6m in 2002 to 6.1m in 2003 while the number of flights arrival at Changi Airport declined 12% y-o-y. As a result of the weak travel demand then, airlines scaled back flights and grounded aircraft which in turn weighed heavily on SIA Engineering’s airframe business (-21% y-o-y in FY03 revenue) and line maintenance and technical ground handling business (-25% y-o-y in FY03 revenue).
While travel demand recovered to pre-SARS level in 4Q 2003, it took 3-6 months for the benefits of recovery to filter down to its airframe maintenance and component overhaul. During the SARS period, SIA Engineering's share price dropped 27% over a 5-month period to the trough level in end-April 2003 and took another 6 months to recover back to pre-SARS level.
Taking into account the potential impact of a SARS-like coronavirus crisis, we revise our forecast for airframe and line maintenance down 10%/15% for FY20 and FY21, respectively.
After adjustments, our fair value estimate decreases from S$2.86 to S$2.41.
Downgrade to SELL.
See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2020-02-11

SGX Stock Analyst Report SELL DOWNGRADE HOLD 2.41 DOWN 2.860