SIA Engineering - DBS Research 2020-11-05: Not Taking Off So Soon

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Not Taking Off So Soon

Downgrade SIA Engineering to HOLD as recovery for MRO business will be slower than earlier anticipated.
Headline loss of S$19m in 1HFY21 worse than expected despite Jobs Support Scheme grants.
Outlook for line management business remains bleak.
No interim dividend for 1HFY21 a further dampener.

SIA Engineering (SGX:S59)'s 2QFY21 headline net loss came in at S$29.7m, down considerably from a profit of S$10.7m in 1QFY21, resulting in a net loss of S$19.0m in 1HFY21 as compared to our existing full-year projection of S$143m profit. However, excluding S$35m in asset impairments recognised on its base maintenance assets during the quarter, SIA Engineering would have recorded a small core net profit of S$5m in 2Q21, largely due to support from Singapore government’s Jobs Support Scheme (JSS).
SIA Engineering has recognised around S$95m in JSS grants in 1HFY21 and more will be recognised till July 2021.
The underperformance was largely driven by lack of recovery in flight numbers at Changi and hence, continued losses at its line maintenance operations.
Core operating performance deteriorated in 2QFY21, with operating loss of S$18.6m compared to S$8.6m operating loss in 1QFY21. In addition to weak line maintenance, heavy maintenance utilisation dipped further and overheads were higher (including forex losses).

At the group level, SIA Engineering's revenue from both its core operations, associated companies and JVs was down 29.1% y-o-y to S$2,194m in 1HFY21, with airframe & line maintenance operations facing a more acute 57.8% drop as compared to a 22.6% decline in engine and component operations.
At the Singapore base, the number of flights handled in Changi Airport by SIA Engineering’s line management unit in 2QFY21 was only at 16% of the same period last year, up marginally from 1QFY21, which saw activity levels at only 13% of 1QFY20. This is in line with flight numbers at Changi Airport, which saw only minor improvement in 3QCY21 (16,430 aircraft movements, down 98.5% y-o-y) compared to 2QCY21 (13,120 aircraft movements, down 99.4% y-o-y).
The resumption of bilateral flights and country bubbles has not progressed according to our expectations, and resumption of international flights trends look to severely lag domestic travel trends, especially as second and third wave concerns emerge in other parts of the globe.
In addition, hangar utilisation declined in 2QFY20 due to limited opportunities in light and heavy maintenance checks during the period. Meanwhile, over at the Clark Base in the Philippines, activity levels plummeted as the base was affected by quarantine measures implemented.

During the quarter, SIA Engineering performed several corporate transactions to streamline its associates and JV portfolio:
1. Acquired Cebu Air’s 35% stake in a former joint-venture company, SIA Engineering Philippines Corporation (SIAEP), and now has 100% ownership of the base maintenance facilities in Clark.
2. Divested its 51% stake in Aviation Partnership Corporation.
3. Acquired remaining 35% stake in Heavy Maintenance Singapore Services (HMSS) from Airbus.
4. Dissolved Line Maintenance Partnership (Thailand), following the dissolution of NokScoot.

IATA’s latest projections points to a sluggish recovery trajectory in 2020-2021, before picking up in 2022-2024 to reach pre-COVID19 levels. In the short-term, the absence of a domestic aviation market in Singapore will certainly constrain SIA Engineering’s recovery.
While the Singapore government has already set up multiple green lane/air travel bubble arrangements with several countries, international air travel will likely stay subdued until a vaccine is successfully developed and distributed. Thus, we do not expect a marked pick up in aircraft movements at Changi in 1HCY21 at least, limiting SIA Engineering’s operating performance improvement for the next 3-4 quarters.

Given the slower than expected recovery timeline of international flights out of Singapore, and factoring in asset impairments, we now project SIA Engineering to report a full-year loss of around S$16m in FY21, which would have been significantly higher if not for the JSS grants.
For FY22, we also cut our earnings projection by 43%, as we expect line maintenance to only recover to around 40-45% of pre-COVID19 levels by then instead of our previous assumption of 80%. If recovery is even slower, there could be further downside to FY22F estimates.

Despite its weaker operating performance, SIA Engineering’s balance sheet remains healthy, with the group at a net cash position of S$502.2m as at Sep-20, down slightly from S$506.5m as at Mar-20. This substantial war chest will enable SIA Engineering to endure a protracted turnaround in the global MRO sector.
SIA Engineering plans to invest S$40m over the next three years to digitalise its operations and implement LEAN programmes to strengthen its operating efficiency.

SIA Engineering announced that it will not be paying out an interim dividend this year (as compared to an interim dividend of 3.0cents/share in 1HFY20) to preserve capital to tide through this challenging period. With full-year losses likely in FY21, we believe dividends could be off the table in FY21, as it is usually based on net profit levels.
For FY22, we are currently projecting 5 cents dividends.

Factoring in the earnings downgrade, we revise our target price for SIA Engineering to S$1.60 (including 20% M&A premium) and downgrade SIA Engineering to HOLD. We will revisit our call once the vaccine scenario becomes clearer.
See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.

Suvro SARKAR DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2020-11-05

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.60 DOWN 2.400