• Results within expectation
• Recent share price action
• Fair value remains at S$2.43

1QFY20 Results in Line

SIA Engineering Company (SIAEC) reported a 0.2% YoY increase in revenue to S$258.1m. Meanwhile, operating profit increased by 73.5% or S$7.5m to S$17.7m, mainly due to a reduction in material costs. Share of profits of associated and joint ventures companies decreased S$6.4m to S$26.0m mainly due to lower contributions from the engine and component segment on the back of higher expenses incurred by the engine centre. Overall, PATMI increased 2.7% YoY or S$1.1m to S$41.6m. 1QFY20 PATMI came up to 25.2% of our full-year forecast, which we consider to be in-line with expectations.

Line Maintenance Joint Venture With NokScoot

SIAEC announced earlier this month that it has incorporated a line maintenance joint venture company in Thailand with NokScoot Airlines Co., Ltd (NokScoot), an associate of Singapore Airlines (SIA). With this addition, SIAEC will have a portfolio of 25 joint ventures across eight countries with original equipment manufacturers (OEMs) and other strategic partners.

Recall that the group continues to extend its line maintenance network in different countries as it believes that the number of heavy checks required by newer aircraft will decrease going forward while more line maintenance work will be done during any spare downtime that is available for aircraft.

Unchanged Fair Value of S$2.43

The stock‟s recent price action has been notable – SIAEC‟s share price rallied 15.1% from S$2.51 on 3 Jul to S$2.89 on 5 Jul, before correcting 8.3% to close at S$2.65 on 26 Jul. We had previously mentioned that a potential privatization by SIA is a possible catalyst for the stock. However, in response to an SGX query on the “unusual price and volume movements”, SIAEC replied that it was not aware of any information not previously announced which would explain the trading movement.

Given the in-line set of results as well as the lack of further indication that a privatization is on the horizon, our fair value remains unchanged at S$2.43 for now. Looking ahead, more transformation initiatives are to be progressively implemented over the next three years. Nonetheless, we believe the MRO environment remains challenging. We maintain our HOLD rating.

Source: OCBC Research - 29 Jul 2019