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


SIA Engineering - Coronavirus Casts Shadow Over Travel Demand

  • SIA Engineering's 3QFY20 PATMI rose 63.1% y-o-y.
  • Coronavirus to weigh on travel demand.
  • Lower Fair Value estimate of S$2.41.

Results above expectations due to one-off tax provisions

  • 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.

Weaker travel demand to weigh on airframe and line maintenance

  • 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