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

SIA ENGINEERING CO LTD (SGX:S59)

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.

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.

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.

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.

1HFY21 was affected by quarantine measures, low flight activities and grounding of aircraft worldwide. The number of light checks fell 57% y-o-y to 109 and that for heavy checks fell 37% y-o-y to 38 in Singapore. There were three (down from 23 in 1H20) heavy checks in Clark Philippines. Since June, restrictions have been eased and half of the Philippine workforce is allowed on-site.
See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.
In reshaping its JV portfolio, SIA Engineering announced the divestment of its 51% shareholding in Aviation Partnership (Philippines) Corporation to Cebu Air. SIA Engineering Philippines Corporation became a subsidiary after SIA Engineering acquired Cebu Air’s 35% stake in SIA Engineering Philippines Corporation.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-04

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.780 SAME 1.780