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SIA Engineering kept on 'hold' as margins stay under pressure, low visibility on engine shop visits

PC Lee

SINGAPORE (May 14): CGS-CIMB Research is maintaining SIA Engineering at “add” with a $3.11 target price given 4Q19 earnings of $49.2 million was 5% ahead of expectations thanks to stronger airframe revenue. FY19 was 2% above CGS-CIMB’s forecast too.

See also: SIA Engineering posts 12.3% drop in 4Q earnings to $49.3 mil; declares 8 cents final dividend

CGS-CIMB says SIAEC’s revenue from airframe & line maintenance grew 1% h-o-h to $498 million with more checks performed in Singapore. Airframe & line maintenance operating margin improved h-o-h to 6.9%, thanks to shorter turnaround time.

Engine & component remained challenging as operating losses widened to $3 million in FY19 vs $1.6 million in FY18. Fleet management (FMP) was profitable but CGS-CIMB says the division requires more scale to see meaningful contribution.

Profit from associates grew 132% q-o-q and 34% y-o-y to $22 million with the absence of one-off tax charge adjustment in 3Q19 to prevailing tax rate for some associates while JV’s profit contribution of $10 million was mainly from rectification work for Trent 1000.

SIAEC’s management expects the associates and JVs workshop volume to be sustainable in the next 12 months.

On the opposite end, UOB KayHian says SIAEC’s work on Singapore Air aircraft could shrink in FY20 due to the grounding of B737 Max which could hit the scheduled maintenance of other aircraft as airlines like SIA aiming to maximise utilisation.

Meanwhile, UOB remains concerned about the continued deterioration in revenue and relative inelasticity of staff cost. In FY19, staff and subcontract costs fell by only half the rate of the decline in topline.

And although SIAEC has stepped up line maintenance operations overseas, these have yet to make any meaningful contribution.

In addition, UOB says there is low visibility on engine shop visits.

“We are unsure if the P&W4000 engine shop visits will continue in FY20 and whether the incremental shop visits from Rolls Royce Trent 1000 will be able to offset the decline in the former over the next two years. The lack of visibility is a concern as dividends from JVs & associates are generally higher than operating cash flow,” says analyst K Ajith.

UOB is maintaining its “hold” and target price of $2.55 with a suggested entry level of $2.30.

Meanwhile, DBS Group Research says while core operating margin improved to 7.6% in 4Q19 from 6.2% in 3Q19 and 4.2% in 1H19, the house believes this will be difficult to sustain amid challenging conditions in the heavy maintenance segment.

Agreeing with UOB, DBS says revenues and operating margins will likely remain under pressure due to additional headwinds stemming from the recent grounding of the B737 MAX aircraft worldwide and more recently, grounding of a few B787 aircraft in the region.

“The grounding of new generation aircraft models has led some airlines to defer heavy maintenance checks on older planes to mitigate the sudden shortage of available planes,” says DBS analyst Suvro Sarkar.

However, prospects for earnings from JVs or associate earnings, driven by engine MRO, still remain fairly healthy though, but overall earnings growth projections for FY19/20 is to remain pretty flattish.

“Factoring in lower dividend assumptions, we arrive at a lower target price of $2.60 for SIAEC and maintain our ‘hold’ recommendation,” says Sarkar.

As at 11.05am, shares in SIAEC are trading 1 cent lower at $2.42.