SIA Engineering - UOB Kay Hian 2022-05-09: FY22 Results In Line; Expecting Stronger FY23 Driven By Accelerated Recovery

SIA ENGINEERING CO LTD (SGX:S59)

SIA Engineering - FY22 Results In Line; Expecting Stronger FY23 Driven By Accelerated Recovery

SIA Engineering’s FY22 revenue of S$566m and headline net profit of S$68m were in line with our full-year forecasts. Business recovery picked up in 2HFY22 and particularly towards the end of FY22.
We are looking at an even faster pace of recovery from the start of FY23 given that the positive impact from Singapore’s border measure relaxations is expected to kick in from Apr 22 onwards.

Maintain BUY with unchanged target price of S$2.90. SIA Engineering is our top sector pick.

SIA Engineering (SGX:S59) reported FY22 net profit of S$67.6m, vs S$11.2m net loss in FY21. The improvement was achieved despite a significant reduction in government wage support during the year.
Excluding the impact of wage support and adjusted for other major one-off items (impairments, disposal gains, tax provision writebacks, etc), SIA Engineering would have registered a S$50m net loss by our estimate, representing a significant improvement against the S$141m net loss in FY21 on the similar adjusted basis. Revenue rose 28% y-o-y to S$566m in FY22 (FY21: S$443m)

Operating loss (excluding wage support) narrowed to S$37m in 2HFY22, from S$62m loss in 1HFY22 and S$69m loss in 2HFY21. JV and associate contribution also improved significantly, though it was partially helped by a sizeable tax provision writeback (the amount was not disclosed but we believe it could be in the north of S$20m).
Management confirmed that even without the tax writeback, the JV and associates’ performance still improved meaningfully in 2HFY22, driven by the recovery in engine and component service volume. SIA Engineering’s quarterly core net losses have been consistently narrowing, to only a tad negative of S$4m in 4Q22 (3Q22: S$7m loss) by our estimate.

As at end-FY22, SIA Engineering had a considerable net cash position of S$623m, equivalent to 21% of its market cap.
No dividends declared for FY22. This is expected as SIA Engineering was still receiving substantial government wage support in FY22, without which the group would have reported a net loss.

Statistics of flight activities at Changi Airport and operating data of Singapore Airlines had picked up remarkably in March. Coming into April and May, the recovery momentum can only be stronger with the tailwinds from Singapore border relaxations (since April) and a number of public holidays and long weekends in May. April aviation data from various public sources support our case of an accelerated recovery.
According to SIA Engineering’s inhouse statistics, its line maintenance business volume had recovered to 45% of the pre-pandemic level in April, compared to 38% in March and FY22 full-year average of 29%.

Given that SIA Engineering’s core between revenue recovery and cost build-up, it would not change our base case of an overall strong recovery in FY23.

We trim in the international air hub Singapore.
Catalysts:
- Core earnings recovery. We believe the market should turn more positive on SIA Engineering for pile to either:
  1. dividend the cash out to shareholders - in this way, more cash would be channelled back to SIA for the parent company to pay for the expensive MCBs; or
  2. utilise the cash for some sizeable acquisition, which should at least beat the parent company SIA’s MCB finance cost of 6%. In that case, a S$600m acquisition could mean additional net profit of S$36m at the steady state, equivalent to 20% of our FY25 net profit forecast of S$188m.
- Either way is a good value-unlocking event for shareholders.
See
SIA Engineering is one of the UOBKH's Singapore Stock Alpha Picks May 2022.

Roy Chen CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-09

SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900