SIA Engineering - DBS Research 2021-02-01: Still Flying Low

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Still Flying Low

SIA Engineering's 3QFY21 revenue flat q-o-q, core net profit shows some improvement from cost controls.
Would be loss making without substantial contribution from government support scheme.
International air travel trends not strong enough to warrant further re-rating at this point.
Maintain HOLD on SIA Engineering with higher target price of S$1.80.

SIA Engineering (SGX:S59)'s 3QFY21 earnings largely in line with expectations. 3QFY21 headline net profit came in at S$7.7m, a slight improvement over core net profit of S$5m in 2QFY21. The improvement is more substantial if we exclude an impairment charge of S$11.8m recorded on its investment in an engine programme in 3QFY21, likely due to better cost controls at core operations. Revenue was flat on a q-o-q basis.
Of course, this performance includes continued financial support from the Singapore government in the form of wage support scheme, without which SIA Engineering would have incurred a net loss of S$44.7m for the quarter. This implies grants income of around S$52.5m for 3Q21, in addition to an estimated S$95m in grants recognised in 1HFY21. The support schemes will be recognised till July 2021, though the quantum will be lower in forthcoming quarters.

The number of flights handled in Changi Airport by SIA Engineering’s line management unit in 3QFY21 was up 23.5% q-o-q but remains subdued at only 19.3% of last year’s level. SIA Engineering also saw some improvement in hangar utilisation, driven by a significant increase in heavy checks, though the number of light checks performed was still languishing more than 60% below the same period last year.
We believe customers may be opportunistically scheduling heavy checks in FY21 before travel recovery over the next 2 years, hence base maintenance volumes are not as badly affected as line maintenance. However, base maintenance has higher operating leverage, hence operating turnaround will be difficult without the line maintenance segment volumes returning.

We expect a sequential decline in SIA Engineering’s earnings in 4QFY21F, driven by a decline in work volumes due to a drop in air travel activity following the recent spike in COVID-19 cases regionally, and the lower degree of wage subsidies from the government (staff costs accounted for 50-55% of total costs pre-COVID19). While SIA Engineering remains committed to streamlining its cost structure, we believe there is limited room to cut costs further from hereon, given the high degree of operating leverage inherent in its business.
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.

SIA Engineering’s fortunes are more closely linked with international travel trends and the absence of a domestic aviation market in Singapore will certainly constrain SIA Engineering’s recovery. With travel restrictions and border closures still in place, the turnaround trajectory for international travel will likely be bumpy. In addition, country vaccination schedules are progressing at different paces, which will restrict international passenger movements in the near term.
According to estimates by the Bloomberg COVID vaccine tracker, the US, Australia, South Korea, Japan, Hong Kong, Macau, India and Indonesia have secured significant quantities of doses to inoculate most of their populations. We forecast international travel activity to reach 60% of 2019 levels by end-2021 and 85% of 2019 levels by end- 2022. (See our 2021 Regional Airlines Sector Outlook: The vaccines are here, but the skies are not clear yet).
For the purpose of SIA Engineering’s line maintenance division, we conservatively project Changi Airport passenger movements to reach 50% of 2019 levels by end-2021 and 75% of 2019 levels by end-2022.
We do not rule out downside risks to our forecasts as slower than expected vaccination trends and rise of mutated virus strains could negatively impact the pace of recovery. Full-fledged recovery in MRO sector is not expected until 2023-2024 timeline at best.

SIA Engineering will continue to ramp up its investments in the areas of digitalisation, technology and automation to emerge stronger from the crisis.Additionally, we could potentially see more impairments in the coming quarters (in addition to S$52m provisions already taken so far in FY21), as SIA Engineering rationalises its investments in JVs and associates.
Nonetheless, SIA Engineering has a robust net cash position and could potentially deploy its capital to capitalise on distressed companies in the MRO sector to bolster its presence in new growth areas.
Dividends look unlikely in FY21 though, as SIA Engineering will likely post headine losses for FY21 owing to the provisions taken during the year.

SIA Engineering's share price has belied our expectations and rallied by almost 20% since November 2020, in line with parent Singapore Airlines (SGX:C6L), on the back of improving sentiment for the airline sector owing to the start of vaccine rollouts globally.
However, we think earnings will remain weak in forthcoming quarters, as the wage support scheme tapers off, and extent of recovery in flight numbers at Changi Airport remains uncertain.
See SIA Engineering Share Price; SIA Engineering Target Price; SIA Engineering Analyst Reports; SIA Engineering Dividend History; SIA Engineering Announcements; SIA Engineering Latest News.
While we raise our SIA Engineering's target price to S$1.80 to account for elevated broad market valuations, we maintain our HOLD call, as we think upside is limited, barring corporate actions like privatisation by parent Singapore Airlines.
In fact, if we strip out privatisation premium from our target price, our fundamental target price for SIA Engineering would be around S$1.50.

Suvro SARKAR DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2021-02-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.80 UP 1.600