SIA Engineering - UOB Kay Hian 2021-05-06: 2HFY21 Marginal Earnings Beat; Recovery Trajectory Remains Uncertain

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - 2HFY21 Marginal Earnings Beat; Recovery Trajectory Remains Uncertain

SIA Engineering's earnings were better than expected, partly due to lower subcontracting costs. However, SIA Engineering continues to face structural challenges, which have been heightened by the COVID-19 pandemic.
SIA Engineering is meeting some of these challenges by diversifying out of Singapore and exploring new business ventures but the impact is estimated to be gradual. Our fair value approximates long-term mean P/E multiple of 18.2x on FY24’s earnings.

Earnings were impacted by fewer flights out of Changi and the Philippines, where SIA Engineering (SGX:S59) has hangars. Earnings were also impacted by the continued grounding of aircraft, which in turn led to extension of maintenance intervals, lower line maintenance checks (-77% y-o-y at Changi) and fewer aircraft maintenance checks.
SIA Engineering received S$86.6m from the Jobs Support Scheme (JSS) payout in 2HFY21, without which losses would have amounted to S$94.4m. SIA Engineering also recognised an S$11.4m impairment charge on an engine programme.
Operating cash flow before working capital changes fell 7% to S$52.8m in FY21, despite SIA Engineering having received JSS payouts for the period. Overall, operating cash flow rose 82% y-o-y due to positive working capital changes.
SIA Engineering did not declare a final dividend.

Airframe and line maintenance revenue was flat y-o-y but operating loss narrowed significantly, despite lower JSS. We believe this was due to lower subcontracting costs, which fell 62.5% h-o-h to S$9.0m.

due to reduction in business volume as a result of fewer flying hours and extension of aircraft maintenance intervals. Contributions from the engine and component segment in 2HFY21were S$66.5 million lower y-o-y, in part due to a one-time increase in tax provision. This was due to a reduction in head count, which led to engine JVs and associates being subject to a higher tax provision.
SIA Engineering did not disclose the quantum of increase in the tax provision.
Going forward, we are not optimistic of a recovery in engine checks from Eagle Services, given that most of the Pratt & Whitney engines are used on older aircraft, which might now come into service after COVID-19 subsides.

Even after COVID-19 subsides, there will be challenges given that airlines have parked aircraft, some of which would not come back into service. Even so, SIA Engineering is exploring new business ventures including:
1. an engine services division to provide on-wing and off-wing maintenance to CFM LEAP engines used on A320 NEO and B737 Max, and
2. SIAEC is also looking to acquire SR Technics Malaysia (SRTM). SRTM provides component repair, testing and overhaul services to Airbus A320, A330, A340 and the Boeing 737NG aircraft in the Asia-Pacific region and beyond.

This raises its own risk profile. SIA is also undertaking substantial sale and leaseback programmes, which could mean that some of the checks that were previously handled by SIA Engineering could be potentially handled by third parties.

We lower our FY22 earnings estimate of SIA Engineering by 84%, factoring in a slower airline traffic recovery.

Maintain SELL. We continue to value SIA Engineering on a DCF basis factoring in dividends from associates but raise our fair value to S$2.00 from S$1.72. At our fair value, SIA Engineering would be trading at 18x FY24’s estimated earnings per share. This is close to the long-term mean P/E average of 18.2x.
See

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-06

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