SIA Engineering - DBS Research 2021-07-26: Corporate Actions The Only Upside

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - Corporate Actions The Only Upside

SIA Engineering reports net profit of S$14.5m for 1QFY22, but without government grants, net loss of S$24.1m.
Tapering of wage subsidies and limit on further cost controls may weigh on extent of earnings recovery.
Possible acquisition of SR Technics Malaysia could be a upside catalyst, balance sheet remains supportive.
Maintain HOLD with higher target price of S$2.05.

SIA Engineering (SGX:S59)'s 1QFY22 headline net profit came in at S$14.5m, up 35% y-o-y and a sequential improvement from S$0.1m net profit in 4QFY21, and forms ~29% of our full-year estimate of S$50m net profit. Barring financial support from the government (still at 50% of monthly wage), the group would have incurred a net loss of S$24.1m for the quarter, thus implying around S$38m+ of government grants, mainly Singapore Jobs Support Scheme (JSS) grants accruals, during the quarter.
We estimate around S$50- 60m JSS grants for SIA Engineering in FY22 under the revised JSS scheme, so wage subsidies will likely taper off after 1H-FY22, unless fresh measures are announced, depending on the COVID-19 situation.

Group revenue came in at S$125.3m in 1QFY22, up 6% y-o-y and 9% q-o-q, driven by some improvement in both line and base maintenance divisions. The number of flights handled in Changi Airport by SIA Engineering’s line maintenance unit in 1QFY22 was up 13% q-o-q, but still remains subdued compared to pre-COVID levels, as flight movements at Changi Airport during 1QFY22 (2QCY21) were down 73% compared to 2019 levels. Flight activities at overseas line maintenance companies also saw a similar slow recovery pace. At the base maintenance division, there was some improvement in hangar utilisation, but this was mainly driven by increase in light checks of a lower revenue quantum. Core operating loss was S$2.9m in 1QFY22, better performance y-o-y, but slightly worse on a sequential basis. Note that base maintenance has higher operating leverage, hence core operating turn around will be difficult without the line maintenance segment volumes returning significantly. Share of associate/ JV contributions came in at S$14.8m in 1QFY22, up 8% y-o-y, as engine and component MRO JVs remained profitable.

We believe the current level of quarterly net profits will be difficult to sustain in the rest of the year as bulk of wage subsidies were recognised in 1QFY22 (staff costs accounted for 50-55% of total costs pre-COVID19). Thus, SIA Engineering’s earnings in 2HFY22 needs to be mainly driven by potential uptick in air travel levels offsetting decline in government grants. While the group 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.
However, concerns remain on the trajectory of turnaround in aviation sector – while Singapore’s vaccine drive has been highly successful at 119 doses administered per 100 population as of 21-July, above the US and near the UK, sluggish vaccination rollouts among other developing economies in Asia, and the proliferation of the problematic Delta variant will likely moderate the pace of the turnaround in air passenger volumes in the region.

SIA Engineering will continue to ramp up its transformation efforts by reshaping the portfolio of subsidiaries and joint ventures, and building capabilities for new generation aircraft and components. In this regard, we note that SIA Engineering has signed an MOU with SR Technics Switzerland to study the potential acquisition talks for its Malaysia unit. SR Technics Malaysia, located in Selangor, Malaysia, is a subsidiary of SR Technics, and provides component repair, testing and overhaul services with a focus on the Airbus A320, A330, A340 and the Boeing 737NG aircraft in the Asia-Pacific region and beyond. SR Technics is an established brand, having started off life with Swissair, and the potential acquisition will enable SIA Engineering to gain exposure to the narrowbody aircraft market, an area that it has had less presence in historically, given parent SIA’s positioning in the widebody intercontinental travel market. The acquisition will enhance SIA Engineering’s component repair capabilities and provide growth opportunities in future.
Pricing will surely be an issue, and there have been no updates on the deal front since March 2021. Nonetheless, we are hopeful of something materialising, as SIA Engineering has a robust net cash position of more than S$600m and could potentially deploy its capital to bolster its presence in new growth areas.

SIA Engineering's share price reached a recent high of S$2.51 in April 2021, before retreating to current levels of S$2.08, and is up only around 5% year-to-date, underperforming the broader STI Index, and in line with our HOLD call on fundamental factors.
The key to share price fluctuations seems to be market speculation on possible privatisation by parent SIA, as corporate restructuring has gathered some momentum in the Singapore GLC space, but so far, nothing has materialised. Our target price for SIA Engineering is revised up to S$2.05, after factoring in air travel recovery in 2H22/ FY23 and imputing 20% privatisation premium. Thus, we do not expect much upside from current trading levels, unless there is positive catalyst from firming up of accretive M&A plans as described above, or credible privatisation news flow.
For now, we continue to maintain our HOLD call on SIA Engineering. After zero dividends in FY21, dividends may be restored in FY22/23, but at lower levels than in the past, and hence, SIA Engineering is no longer a yield stock as in the past, removing a key support.
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Suvro SARKAR DBS Group Research | Jason SUM DBS Research | https://www.dbsvickers.com/ 2021-07-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.05 UP 1.800