SIA Engineering - DBS Research 2020-07-20: Beyond The Worst

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Beyond The Worst

Number of flights handled in 1QFY21 in line maintenance division down to 13% of pre-COVID levels.
SIA Engineering's 1QFY21 revenue falls 54% y-o-y, net loss avoided with the support of significant government grants.
Slow recovery hereon, picking up pace in FY22.
HOLD on for long term value of franchise, Target Price lowered to S$2.10 in line with further near-term earnings cuts.

1QFY21 numbers for SIA Engineering (SGX:S59) were downbeat as expected, with flights handled at Changi down by more than 87%, and overall revenues down 54% y-o-y. The group would have been deep in the red owing to its high operating leverage, if not for the Singapore government’s Jobs Support Scheme (JSS) grants, which helped to keep the bottom-line positive.
Recovery in flight traffic is still slow, but we believe the worst is past us and numbers will sequentially improve hereon. We choose to be more conservative about flight traffic assumptions for the rest of FY21 and FY22 though and cut our net profit estimates by 30%/ 35% respectively.
Note that FY22 does not have the benefit of JSS grants, so the earnings recovery is much steeper than it looks. Cash reserves still look solid and should enable SIA Engineering to maintain dividends at 8Scts in FY21.
Maintain our HOLD call with a lower Target Price of S$2.10, as the Target Price factors in not just the weak FY21 but SIA Engineering’s long term prospects and business model, which will remain relevant once the pandemic is history.

As expected, 1QFY21 was a quarter to forget for SIA Engineering, as travel restrictions around the world stayed in place and flight traffic virtually came to a standstill for much of the quarter.
At its Singapore base, flights handled by SIA Engineering’s fleet management division declined almost 87% y-o-y, while base maintenance volumes, fleet management revenue and JV/ associates performance were all significantly affected by the reduction in flying hours and grounding of aircraft by parent SIA and other third-party customers.

SIA Engineering's 1QFY21 revenue declined 54% y-o-y to S$118.5m, with heavy maintenance (base maintenance) likely the biggest contributor – some customers may have brought forward heavy checks to take advantage of the grounding and the group reported an operating loss of S$8.6m, compared to an operating profit of S$17.7m in 1QFY19.
Without the support cushion of the Singapore government’s Jobs Support Scheme (JSS), however, we estimate the operating loss would have been higher at S$55m or so, demonstrating the high operating leverage inherent in the business model.
JV/ associates contribution came in at S$13.7m, down 47% y-o-y.
Net profit for 1QFY21 came in at S$10.7m, down 74% y-o-y. Without JSS cushion, management estimates the group would have recorded a net loss of S$36.7m.

The Jobs Support Scheme will be the key savior for SIA Engineering’s reported financials in FY21. Under the Fortitude Budget, JSS has been increased to 75% for MRO operators, from 25% earlier and the grants recognition will be accrued over March to December 2020 (first 3 quarters of FY21).
We estimate SIA Engineering could receive around S$125m of grants in total in FY21, and that will help the company stay profitable overall on the bottom line in FY21.

We had expected flight activities at Changi Airport, which drives line maintenance demand for SIA Engineering, to pick up from June onwards with some bilateral traffic bubbles opening, but momentum has not picked up materially yet.
We now expect traffic at Changi Airport to recover slower than our earlier numbers, with 2QFY21 down almost 70% y-o-y and 3QFY21 down 40% y-o-y. We believe it is unlikely that flight numbers will recover to pre-COVID levels before 2022, which is FY23 in SIA Engineering’s case. Hence, we are cutting our fleet management revenue estimates for SIA Engineering further, and in turn, net profit, by 30% and 35% for FY21 and FY22 respectively to S$89m and S$100m.
Note that FY22 will not have the benefit of JSS grants, so the implied recovery in earnings in FY22 is much steeper than it looks.
See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.

While the impact to core operating profit will be far worse than SARS crisis in FY04, consensus net profit estimates for FY21 seem too bearish, given the level of grant income expected, which should partially offset the decline.

Suvro Sarkar DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2020-07-20

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.10 DOWN 2.300