• SIA Engineering’s 3QFY3/20 net profit beat expectations with the help of a tax write-back at associates. EBIT margin was stable y-o-y at 6.3%.
• We expect a SARS-like impact from the novel coronavirus on SIA Engineering’s line maintenance as flight throughput at Changi falls during 4QFY20.
• We remove SIA Engineering from our country pick and downgrade to HOLD with Target Price SGD2.70. Our EPS is cut by 6-19% for FY20-22F.

Earnings Beat Thanks to Tax Concession at Associates

• There was no analyst briefing for SIA Engineering (SGX:S59)’s 3QFY20 earnings. 3QFY20 net profit of S$54m (+17% q-o-q, +64% y-o-y) beat our forecast of S$50m due to a tax write-back from a tax concession. 9MFY3/20 net profit formed 82%/78% of our/Bloomberg consensus FY20F.
• Associate profit contribution for 3QFY20 rose 190% y-o-y and 56% q-o-q to S$28m. Note that there was a one-off tax charge in 3QFY19 as the tax qualification for the engine and component centres was affected by restructuring plans at the parent company. The tax concession was granted in 3QFY20. This was offset by higher costs for the ramp-up of new engine capabilities for engine centres; hence, JV contribution fell 34% q-o-q to S$12m.
• Group revenue for 3QFY20 dipped 1% q-o-q and 2% y-o-y to S$252m. EBITDA margin improved 29bp y-o-y but dipped 8bp q-o-q to 14.3%. Total opex was flat q-o-q at S$236m.

Line Maintenance Volume Likely to Hurt Flight Share at Changi

• During SARS, as SIA mainline cut its ASK by 30% during the Apr-Jun 2003 quarter, SIA Engineering’s revenue from line and airframe maintenance fell by 23% y-o-y and net profit slid by 32% y-o-y in FY3/04. Associate and JV contributions were not spared with 31% y-o-y plunge in profits.
• Changi flights handled were down by 35% from 14,666/month in Nov 2002 to the trough of 9,555/month in May 2003. The volume took six months to return to normal levels of above 14,000/month in Nov 2003.
• SIA Engineering commands the lion’s share of handling flights at Changi (above 80%), in addition to generating 60% of its revenue from Singapore Airlines (SGX:C6L). Therefore, we expect the current coronavirus pandemic to have SARS-like impact on SIA Engineering’s operations.
• We forecast 5%-10% and 15-18% drop in SIA Engineering’s line maintenance and airframe revenue respectively in FY20-21F.

Downgrade to HOLD; Net Cash to Sustain DPS

• Near-term outlook is uncertain for SIA Engineering; however, in the medium term, we still see it as an M&A play with Singapore Airlines either taking SIA Engineering private or divesting its stake.
• We cut our EPS by 6- 19% for FY20-22F to reflect weaker aviation sentiment. The stock is now trading at 19.8x CY21F or -1 s.d. of its 6-year average; we see potential downside to -1.5 s.d. (17.8x) from the novel coronavirus impact.
• The positive is its strong net cash of S$438m (as at 9MFY20) which is likely to sustain its DPS at S$0.11 for FY20F, translating into a yield of 4.2%.
• A potential upside risk is a sharp rebound in flight volumes while a downside risk is prolonged and wider outbreak of the coronavirus.

Source: CGS-CIMB Research - 7 Feb 2020