SIA Engineering - UOB Kay Hian 2020-02-10: 3QFY20 Tax Writeback At Associates & JVs Lead To Earnings Growth

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

SIA Engineering - 3QFY20 Tax Writeback At Associates & JVs Lead To Earnings Growth

  • We are slightly disappointed by the quality of earnings. Revenue declined in 3QFY20, reversing from past two quarters’ of growth. In addition, we are uncertain about the extent of growth at JV & associates as SIA Engineering simply indicated that it was comparable to the prior period (yoy), excluding tax writebacks.
  • Even so, we are encouraged by the strong cash generation and expect SIA Engineering to be FCF positive in 4QFY20, even after assuming a 10% reduction in flight volume for Feb-March.
  • Maintain BUY.



3QFY20 RESULTS


Headline earnings better than expected by quality of earnings disappoint.

  • SIA Engineering (SGX:S59)'s 9MFY20 earnings amounted to 78% of our and 81% of street’s full-year estimates. Revenue declined in the quarter due to weak earnings from airframe and line maintenance revenue. Operating profit was flat y-o-y in 3QFY20 vs the 73% y-o-y increase in the past two quarters. See SIA Engineering Announcements.
  • Much of the improvement at the bottom-line came in from JV & associate segment, where earnings doubled. SIA Engineering indicated that the increase was mainly due to the writeback of tax concessions, upon confirmation of tax concession granted for certain engine and component centres. Excluding that, earnings from JV & associates were said to be comparable to the previous period.

Operating cash flow before working capital changes rose 34.4% yoy in 3QFY20.

  • As at 9MFY20, SIA Engineering generated S$56.7m in FCF a fourfold increase, but this was also due to lower capex.


STOCK IMPACT


More guarded statement on outlook.

  • Not surprisingly, SIA Engineering warned that the operating environment has become more challenging, due to “the rapidly evolving novel coronavirus situation” This stands in contrast to 2QFY20’s guidance on “transformational efforts are translating into improvement in operating performance” under its outlook statement.
  • We believe that SIA Engineering is expressing concern over the steep cut in capacity by airlines and the impact on flight arrivals and hence line maintenance earnings. We are also slightly disappointed with the flat operating profit as we had expected continued cost savings from the use of robotics.

Stay invested, strong cash generation is a key positive.

  • We also believe that SIA Engineering could benefit from increased checks by airlines during periods of low utilisation, but this might not be sufficient to offset the lower line maintenance revenue arising from a decline in flight arrivals.


EARNINGS REVISION/RISK

  • We lower our FY20 and FY21 net profit estimates by 1% and 4.2% respectively as we factor in lower line maintenance revenue.


VALUATION/RECOMMENDATION


Maintain BUY.



SHARE PRICE CATALYST/RISKS

  • Airlines reinstating capacity.
  • Key risk is continued capacity cuts by airlines beyond end-Mar 20.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-02-10
SGX Stock Analyst Report BUY MAINTAIN BUY 3.130 SAME 3.130



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