SIA Engineering gets 4 'buys' as transformational efforts yield results

SINGAPORE (Nov 5): SIA Engineering’s (SIAEC) transformational efforts are starting to take effect, say analysts who are impressed with its 2Q19/20 results ended Sept.

They say core operations from Singapore Airlines’ 77.4%-owned aircraft maintenance unit put up another strong showing in 2Q19/20 with core operating margins hiting its highest level of 15.2% since 1Q18/19. SIAEC’s revenue had also risen for two straight quarters.

To recap, SIAEC reported earnings of $46 million, or 4.11 cents per share, for 2Q19/20 ended Sept. This was 21.1% higher compared to a year ago.

Revenue at $254.6 million was 1.3% higher y-o-y. Revenue from the airframe and line maintenance segment increased $4.6 million, offset in part by a $1.3 million decrease in revenue from the engine and component segment.

Expenditure decreased 2.1% to $235.0 million, mainly due to lower subcontract costs and a favourable exchange variance. As a result, operating profit increased 73.5% to $19.6 million.

Second quarter’s share of profits from associated and joint venture companies was $27.4 million, 8.7% lower y-o-y, with $28.5 million profit from the engine and component segment and a loss of $1.1 million from the airframe and line maintenance segment. Contributions from the engine and component segment came in $0.9 million lower, while contributions from the airframe and line maintenance segment decreased $1.7 million y-o-y.

For 1H19/20, SIAEC’s earnings improved 11.6% to $87.6 million from a year ago. This came from an increase in operating profit, partially offset by a decrease in share of profits of associated and joint venture companies.

There were three calls to maintain SIAEC on “buy” and one upgrade to “buy” after the aircraft maintenance company reported its second quarter results on Nov 1.

In a Tuesday report, UOB KayHian analyst K Ajith says SIAEC’s 2Q19/20 net profit gains were driven mainly by a 74% y-o-y improvement in operating profit.

That was due to a 50% cut in accommodation cost; 13% cut in sub-contract cost; and 19% cut in other operating expenses including positive forex variance, including cost savings arising from productivity innovation.

“We believe the substantial operating leverage was partly due to automation efforts,” says Ajith who pointed to the use of automated aircraft towing tugs to trim manpower needs.

In addition, while Changi Airport’s aircraft movements fell 1.3% y-o-y in 1HFY20, SIAEC’s flights handled at Changi rose 2.7% yoy due to the acquisition of four new customers including Vistara, Jeju Air and AirAsiaX.

UOB has upgraded SIAEC to “buy” with fair value of $3.13 or 19.4 times FY20F earnings, lower than its five-year mean PE of 20.7 times.

In a Monday report, Maybank KimEng analyst Neel Sinha agrees transformational initiatives contributed to “the lion’s share of bottom-line growth” although 2Q19/20 revenues grew a pedestrian 1.3% y-o-y and profits from associates and JV partners fell 9%.

Sinha says the poor associate/JV performance should be temporary as associate Eagle Services Asia ramps up its workshop in preparation for the aftermarket MRO of Pratt & Whitney’s relatively new GTF engine family that powers the Airbus A220, A320neo and Embraer E190 aircraft.

Sinha says among SIAEC’s new ventures expected to start contributing fairly soon is its 49% associate NokScoot which is ready for line maintenance of its fleet at Don Muang Airport in Bangkok.

As such, Maybank is keeping its “buy” with a higher target price of $3.00.

Apart from the usual reasons, analyst Suvro Sarkar of DBS Group Research says he is maintaining its “buy” call with $3.30 target due to higher workload at its engine shops due to persistent problems with the Trent-1000 engines as well as a boost in maintenance work volumes due to delays in retiring older aircraft following the protracted global grounding of the B737 Max aircraft.

In a Tuesday report, Sarkar says while privatisation remains a possible catalyst for the stock, the current valuation for SIAEC is “attractive at close to multi-year lows at about 17 times forward PE and dividend yield is healthy at 4.3%”.

Lastly, CGS-CIMB Research is also maintaining its “buy” call with $3.30 target price. Analyst Lim Siew Khee says 1H19/20 revenue rose 1% y-o-y to $513 million while opex was down 2% y-o-y to $475 million on good control of staff costs. 1H19/20 operating margin for the division almost doubled to 8.6%.

In a Monday report, Lim says process re-engineering to improve throughput, as well as investment in technology and innovation have led to visible increase in operating profits of airframe, overhaul and line maintenance division.

“We think the upward trend is likely to continue as 2Hs are generally stronger and yield improvement from transformation efforts,” says Lim.

Other things to look forward to include margin expansion, the 2020 Singapore Airshow, stronger results from associates/JVs as operating leverage improves, potential privatisation by SIA, and higher dividend.

As at 4.33pm, shares in SIAEC are up 6 cents at $2.83 or nearly 19 times FY20F earnings according to CGS-CIMB’s valuations.