• Government's Jobs Support Scheme (JSS) (c.S$47m) helped SIA Engineering turn to profits (S$11m) instead of a loss of S$37m in 1Q21. This is a positive read through for peer, ST Engineering (SGX:S63).
• Revenue down 47% q-o-q and 53% y-o-y to S$119m in 1Q, with the number of flights handled at 13% of pre-Covid level. Operating loss was S$8.6m.
• Although flight activities started to pick up in Jun, the increase was immaterial with no clear signs of pick-up.
• Maintain HOLD and target price of S$1.78.

SIA Engineering 1Q21 Business Update

• SIA Engineering (SGX:S59) recorded revenue of S$119m for 1QFY3/21. With cost measures implemented and grants from government support schemes, operating expenses were lowered to S$113m (-53% y-o-y, -47% q-o-q). Net profit for 1Q21 at S$10.7m (-74% y-o-y, -80% q-o-q).
• We estimate SIA Engineering received about S$47m of Job Support Scheme (JSS) in 1Q21, thanks to the recategorisation of aerospace MRO operators to first tier of 75% of wage co-funding (previously 25%). We see this as a positive read through for peer, ST Engineering (SGX:S63), as the latter could also qualify for first tier JSS recognition (potentially S$100m in 1H20).
• Yet, SIA Engineering still incurred an operating loss of S$8.6m. SIA Engineering will recognise the JSS grants over the period of Mar 20 to Dec 20.
• Measures taken in previous months have continued, including management pay cuts, a 25% reduction in Board of Directors’ fees, and voluntary and compulsory no-pay leave. More cost-cutting is expected.

Associates Down 47% Y-o-y

• Share of profits of associates and JV was S$13.7m (-47% y-o-y, -61% q-o-q). Operations were similarly affected by a reduction in flying hours and extended maintenance intervals, partially offset by cost saving measures and government support.
• Plant shutdown was also implemented at some of the engine and component joint ventures on specific days, in response to slow work volume, to reduce operating cost.

No Clear Signs of Pick-up

• SIA Engineering’s 1Q21 flights handled in Singapore was only 13% of what it used to handle pre- COVID-19. Its base maintenance unit had fewer airframe overhaul checks and airline customers under fleet management business reduced flying hours significantly.
• Flights started to pick up in Jun in Changi but the increase was not material. With no clear signs of a stronger pick-up in flight frequencies, the outlook for our MRO business will be challenging.

SIA Engineering's Balance Sheet Remains Strong, Maintain HOLD and Target Price of S$1.78

• SIA Engineering kept a strong cash balance of S$563m with low borrowings. Basic EPS and NAV per share at 30 Jun 2020 was S$0.96 and S$1.45, respectively. No change to our EPS for now.
• Our Target Price is pegged to -2 s.d. of long-term mean, or 1.3x FY21F.
• Key downside risk is a second wave of Covid-19.
• Upside risk is corporate action from parent Singapore Airlines (SGX:C6L) or sharper-than-expected recovery.

Source: CGS-CIMB Research - 18 Jul 2020