SIA ENGINEERING CO LTD (SGX:S59)
SIA Engineering 3QFY21 - Q-o-q Improvement, But Expect Lower JSS For The Next 3 Quarters
- On a q-o-q basis, Singapore Airlines (SGX:C6L)’s operating profit improved despite flat revenue. We believe some of this could be due to cost saving initiatives and marginally higher JSS.
- However, SIA Engineering faces an uphill task in growing revenue, with 60% of revenue accruing from Singapore Airlines.
- We are also not confident of a recovery in JVs and associates as a reduction in JSS should impact margins. Maintain SELL. Target price: S$1.64.
SIA Engineering's 3QFY21 Business Update
Headline net profit showed q-o-q growth potentially on cost savings or productivity initiatives.
- SIA Engineering (SGX:S59) released a business update for 3QFY21 (Oct 2020 to Dec 2020) with minimal data. See SIA Engineering's announcements. Revenue was flat q-o-q, despite a 23% q-o-q increase in line maintenance work as well as a 78% q-o-q increase in heavy maintenance checks. However, operating profit reversed from a loss of S$18.6m to a S$1.1m gain. SIA Engineering did not indicate why this was the case, but we note that Jobs Support Scheme (JSS) payout recognition was about S$3.5m higher q-o-q.
- We also believe SIA Engineering’s staff cost could have been lower q-o-q, following voluntary retirement programmes earlier. SIA Engineering also made an impairment charge on its investment in an engine programme, which we believe was recognised below operating level.
- SIA Engineering's cash balance rose by S$5.1m to S$519m.
Associate and JV companies earnings at $12.3 million, fell 69% yoy and 16.3% qoq.
- SIA Engineering noted that contributions from associated and JV companies were similarly impacted by the reduction in flying hours and extended maintenance intervals, partially offset by cost saving measures and government support.
SIAEC likely to have recognised lower staff costs in 3QFY21, but warns of lower JSS in 4QFY21.
- SIA Engineering noted that measures taken earlier, including the release of contract staff, release of staff under voluntary no pay leave and early retirement, salary cuts and furlough, had mitigated manpower surpluses and reduced operating costs.
- Separately, SIA Engineering warned that JSS payout will taper down to 50% from 75%, implying an approximate S$17m q-o-q reduction.
9MFY21’s earnings better than expected, likely due to cost savings…
- SIA Engineering's 9MFY21 loss of S$11.3m amounts to 42% of street’s full year loss estimate and 31% of our full year estimate. Assuming that there are no further impairments in 4QFY21, and even after factoring in a reduction in JSS for 4QFY21, there is some upside risk to our prior loss estimate of S$36.7m.
…but any recovery in revenue is likely to slow, given that about 60% of revenue is attributed to SIA.
- We have assumed a 39% y-o-y increase in revenue, which assumes not just a recovery in Singapore Airlines’ own traffic but also an increase in transit traffic. However, we believe that a recovery in transit traffic could be slow, given that airlines and passengers would opt to fly direct to avoid regulatory checks.
- We also estimate that JSS would decline by at least two-thirds in FY22 and SIA Engineering’s losses could rise, especially if traffic recovery is pushed back to 2HFY22.
Maintain SELL
- See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News. We lower our SIA Engineering's FY21 loss forecast by S$8.7m to S$28.2m, factoring in lower opex. Maintain SELL with a target price of S$1.64 (previously: S$1.52).
- We have raised our terminal growth assumption from 0.8% to 1.0% At our fair value, SIA Engineering would be trading at 1.2x FY22F book value.
K Ajith
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-02-01
SGX Stock
Analyst Report
1.64
UP
1.520
