SIA Engineering - OCBC Investment 2020-07-20: Outlook Remains Cloudy


SIA Engineering - Outlook Remains Cloudy

  • Weak performances across all segments.
  • Losses cushioned by Job Support Scheme (JSS).
  • No signs of material improvement in flight activities.

SIA Engineering's PATMI recorded a profit of S$10.7m in 1QFY21, thanks to government support

  • SIA Engineering (SGX:S59)’s 1QFY21 results came in below our forecasts. Revenue fell 54% y-o-y to S$118.5m due to weaker performances from all segments. PATMI declined 74% y-o-y to S$10.7m (22% of our initial estimates), cushioned by government support under the Job Support Scheme (JSS) which has been increased to 75% from 25% for the aerospace MRO operators under the Fortitude Budget. Excluding the impact of JSS which was estimated to be S$47.4m in 1QFY21, PATMI would have recorded a loss of S$36.7m.
  • SIA Engineering would recognise the JSS grants over the period of March to Dec 2020.
  • Performances from its JVs & Associates were similarly impacted this quarter which saw share of profits declining 47.3% y-o-y to S$13.7m this quarter.

Travel demand likely to remain weak over a longer period

  • Flights handled at Changi Airport was only ~13% of pre-Covid-19 levels in 1QFY21. SIA Engineering’s airframe and line maintenance segment (88.5% of FY20 revenue) took a direct hit from a reduction in flights caused by Covid-19.
  • Flights handled at Changi by line maintenance was down 87.1% y-o-y. The number of heavy and light checks performed at Singapore base also declined 25% and 55.4% y-o-y respectively given extended maintenance intervals and less heavy maintenance required with the grounding/parking of more old aircrafts (leaving newer aircraft in operations).

Higher Fair Value estimate of S$1.80

  • While SIA Engineering could benefit from easing travel restrictions, barring subsequent waves of infections, there are still no clear signs of strong pickup in flight frequencies. Flights movements at Changi Airport were down 84.8% y-o-y in June as compare to a decline of 87.7%/85.9% y-o-y in Apr/May.
  • The International Air Transport Association (IATA) estimated that travel demand is likely to take a longer recovery path and will only recover to pre-Covid-19 levels in 2023.
  • SIA Engineering is trading at 41.3x forward PE, 3 s.d. above its 10-year mean of 19.7x. We believe that the optimism from reopening of borders have been largely priced in. We pare our FY21/FY22 PATMI by 13%/4% on longer travel recovery while decreasing our COE to 8.3% given the re-opening of borders.
  • After adjustments, our fair value estimate increases from S$1.41 to S$1.80.
  • 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/ 2020-07-20
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