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Author: kimeng   |   Latest post: Thu, 7 Nov 2019, 5:40 PM

 

SIA Engineering: Headwinds and Some Turbulence

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  • Share price correction since downgrade
  • Competition remains unabated
  • Well-placed with strategic partnerships

Down 15% Since Downgrade… Hitting 52- Week Low

The share price of SIA Engineering Company (SIAEC) has corrected by about 15% since our downgrade on 9 Nov 2018 post 2QFY19 results, based on the last close on 23 Nov. Recall that results were slightly below our expectations with the airframe and line maintenance segment seeing a 43% YoY fall in operating profit to S$22.6m in the quarter.

A reduction in work volume and keen competition has weighed on results, and this may continue in the mean time, pressuring operating margins and hence possibly dividends in the future. There were fewer “C” checks maintenance in the Singapore base in 1HFY19, though the number of “A” checks (lighter than “C”) was higher.

The number of checks that can be undertaken is also constrained by hangar capacity, and should aircraft spend a longer time parked in the hangar, it would also mean missed opportunities to undertake maintenance work for other aircraft.

Few Catalysts for Now… Monitoring Competition Over Longer Term

Time will be needed for the group to realise the full benefits of the transformation journey which SIAEC started in Apr, with measures to increase productivity, reduce costs and upgrade capabilities. We had mentioned in our earlier report that this may take up to two years.

Meanwhile, we see few catalysts for the stock, except for

  1. less pricing pressure from airlines under a lower oil price environment, or
  2. a possible privatisation by SIA.

The latter has been a topic of interest for years but there has been more talk ever since news of HAECO’s privatisation by Swire Pacific in Jun this year. As a reference, the offer for HAECO was at an estimated 2.2x P/B and 9.4x P/OCF (based on average operating CF in the past five years). 2017 earnings was negative.

With the dim outlook, we fine-tune our estimates as well as terminal growth assumption from 1% to 0.5% such that our FV estimate slips to S$2.64. Over the longer term, the competition from rivals such as Chinese MRO providers may remain unabated, though SIAEC is still relatively well-positioned with its strategic partnerships.

Source: OCBC Research - 26 Nov 2018

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