Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


SIA Engineering - Run Its Course for Now

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SIAEC 1Q20 in Line; Downgrade to HOLD

  • SIA ENGINEERING CO LTD (SGX:S59)'s 1Q20 results were in line with our expectations with revenue/PATMI accounting for 23%/25% of FY20E forecast.
  • Consolidated operations performed slightly better than anticipated principally from lower operating costs but this was offset by softer than expected associates/JVs performance.
  • SIA Engineering’s business transformation initiatives appear to be on track but the c8% share price appreciation over the past month mutes return potential to our SGD2.85 target price.
  • Downgrade to HOLD from BUY.

Associates Dragged the Operating Growth

  • Although revenues were flat y-o-y, lower operating costs drove margin improvement and a significant 51% y-o-y increase in EBITDA (albeit from a low base in 1Q19). However this EBITDA growth was offset by weaker than expected associates/JV profit, down c20% y-o-y.
  • Engine and components associates/JVs contribution fell c19% y-o-y on account of higher costs incurred for new engine capabilities, while airframe and line maintenance associates/JVs losses widened marginally to SGD0.7m.

Guidance muted; Boeing issues linger.

  • SIA Engineering’s outlook statement indicates that while management are beginning to see improvements in productivity with the transformation initiatives and technology adoption, the operating environment still remains challenging.
  • Also the Boeing issue with the grounding of six B737MAX and two B787—10 aircraft by its customers Silkair and SINGAPORE AIRLINES LTD (SGX:C6L) could potentially prolong the maintenance cycle for the rest of their fleets.

Minor forecast tweaks; valuation unchanged

  • We have made minor sub-1% tweaks to our FY20E/21E/22E PATMI forecasts from SGD167.9/181.4/201.4m to SGD168.4/182.2/200.8m from adjustments related to details in SIA Engineering’s recently released FY19 annual report. We believe SIA Engineering share price sharp appreciation of the past month has little to do with operations but is on the back of market conjecture of SIA Engineering being a potential privatisation candidate.
  • With upside potential to our DCF based (unchanged 8% WACC; 2% TGR) SGD2.85 Target Price now at single-digit levels, we downgrade rating to HOLD from BUY.

Source: Maybank Kim Eng Research - 29 Jul 2019

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