SIA Engineering - CGS-CIMB Research 2020-11-04: Pending Changi Airport Traffic


SIA Engineering - Pending Changi Airport Traffic

  • SIA Engineering missed ours and consensus expectations and swung into a loss of S$19m in 1HFY21 (Apr - Sep 2020), hurt by weak revenue and impairment of base maintenance.
  • Saving grace is SIA Engineering's net cash position of S$502m although no interim dividend was declared in 1HFY21.
  • We expect SIA Engineering's share price price to move sideways with the slow recovery in Changi Airport traffic capping its previously steady line maintenance revenue.

Reiterate HOLD on SIA Engineering

  • At c.1.2x FY21F P/BV, we think SIA Engineering (SGX:S59)’s current valuation of close to -2 s.d. of long-term mean rightfully reflects the uncertain outlook of aviation recovery, especially Changi Airport’s traffic.
  • Although Singapore has increased the number of countries in the ‘green lanes’ travel arrangement, including opening up to Chinese and Australian travellers form 6 Nov, we think reciprocal arrangements are key. Using IATA’s projection as a base (i.e. full recovery to pre-pandemic levels in 2024, one year later than its previous forecast), we believe SIA Engineering’s recovery will first be dependent on Singapore Airlines (SGX:C6L) group (historically c.60% of revenue), as well as when Changi Airport reopens its gates, impacting SIA Engineering’s aircraft/engine and line maintenance.
  • However, the worst could be over and we think 1HFY21 could mark the bottom in terms of operations and earnings. Our Target Price is still based on 1.3x FY21F P/BV (20% above -2 s.d. long-term).
  • A potential downside risk is slower-than expected recovery in the aviation industry; an upside risk is corporate action from parent Singapore Airlines.

Impairment of assets dampened 1H21 bottomline

  • SIA Engineering reported a loss of S$19m for 1HFY21 (Apr - Sep 2020). 1H core profit was at S$16m or 33% of consensus FY21F but above our S$5m (thanks to Job Support Scheme of S$95.6m). 1HFY21 revenue of S$223m (-56% y-o-y) was not a surprise, albeit slightly weaker than our expectations at 44% of our FY21F.
  • The reported loss miss was largely due to the S$35m impairment of base maintenance to account for a significant decline in hanger revenue projections due to lower flight hours, leading to a large number of aircraft being taken out of operations and parked. There is also a chance that these parked aircraft will not return to operations.
  • SIA Engineering also said that the uncertain outlook needs to be monitored closely for additional impairment, if required. Net cash stood firm at S$502m as of 1H21.

Expect slow recovery for JVs and associates

  • Profit from JVs and associates was down 47% y-o-y to S$28.4m in 1HFY21. The recovery for JVs and associates depends on worldwide aviation traffic recovery, with short-haul travel likely to return before international travel. This implies that the recovery for its JV, SAESL (Rolls Royce engines and more dependent on wide body aircraft) could be slow. This is offset by the backlog of Trent 1000 rectification work.
  • SIA Engineering also expects weaker returns for its associate, Eagle Services which services Pratt & Whitney’s GTF engines that mainly power the new A320 narrow body aircraft.

Expect better 2HFY21F for SIA Engineering

LIM Siew Khee CGS-CIMB Research | 2020-11-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.780 SAME 1.780