SIA Engineering - CGS-CIMB Research 2021-05-05: Worst Is Behind, Recovery Slow


SIA Engineering - Worst Is Behind, Recovery Slow

  • Operationally, SIA Engineering could have bottomed out as the number of light and heavy checks improved 13% h-o-h and flights handled rose 46% h-o-h in 2HFY3/21.
  • Impairment of assets also narrowed by 68% h-o-h to S$11m. We believe SIA Engineering has taken in ‘as much as it could’ given the challenging environment.
  • SIA Engineering's FY21F core profit of S$37m was in line with our forecast (S$36m) but above consensus (S$9.6m). BUY on dips; border reopening is still a catalyst.

Mix of aircraft preservation and return to service checks

  • SIA Engineering (SGX:S59) performed a total of 150 checks (+13% h-o-h, -49% y-o-y) in 2HFY21, comprising 114 (+5% h-o-h) light checks at the apron and 36 heavy checks (+50% h-o-h). In line with Changi’s flight movement, SIA Engineering’s flights handled improved 46% h-o-h to 16,455 (-77% y-o-y).
  • SIA Engineering is seeing steady but slow pace of recovery. Work demand is mainly from
    1. aircraft preservation (active and long-term storage),
    2. return to service (lower than C checks) and
    3. A/C checks.
  • SIA Engineering's 2HFY21 revenue was flat h-o-h at S$220m as a result of more light checks performed.

Core profit in line, reported profit affected by impairment

  • 2HFY21 reported profit of S$7.8m was below our forecast due to S$11m impairment of investment in Pratt & Whitney 1200 engine programme that supports the suspended Mitsubishi space jet. Excluding the impairment, SIA Engineering 's core profit would have been higher at S$20.9m, in line with our S$19m estimate.
  • FY21 core profit of S$37m was also in line with our expectations (S$36m) but above consensus (S$9.6m). FY21 reported loss of S$11m was also narrower than consensus forecast of -S$19m.

Associates affected by one-off tax charges

  • SIA Engineering 's 2HFY21 share of associates and JVs of S$11m was below our expected S$35m due to one-time tax charge for a group of associates. These associates were previously qualified for concessionary tax rates of 8-10% (incentive scheme by the Economic Development Board) but eligibility was affected by staff rationalisation measures and COVID-19.
  • Qualification process is currently under appeal. Without these, FY21 contribution from associates/JVs would have been ~S$64m (-50% y-o-y) and in line with our forecasts.

JSS extended to Jan 22

  • SIA Engineering received a total of S$182m in FY21 from the Jobs Support Scheme (JSS) and we estimate ~S$86m in 2HFY21 with 50% of the staff costs shared. SIA Engineering will continue to recognise JSS till Jan 22. Staff costs were down ~31% y-o-y, excluding JSS support.

Calculated risk expansion; reiterate ADD and target price of S$2.85

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2021-05-05
SGX Stock Analyst Report ADD MAINTAIN ADD 2.850 SAME 2.850