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SIA Engineering (SIE SP) Beneficiary of borders reopening

• Net profit swung into profit in 1HFY22
• Job Support Scheme tapered to SGD64.5m
• Undemanding valuations

1HFY22 results beat expectations

SIA Engineering Company (SIAEC)’s 1HFY22 results beat our expectations due to absence of impairment loss. Revenue increased 18.2% YoY to SGD263.5m on the back of higher flight activities. Share of profits of JVs and associates fell 5.6% YoY to SGD26.8m, weighed down by a loss of SGD5.5m from the airframe and line maintenance segment. Consequently, bottom-line turned from a loss of SGD19.0m in 1HFY21 to a profit of SGD25.0m in 1HFY22. Without the Job Support Scheme (JSS) of SGD64.5m (vs. SGD95.7m in 1HFY21), PATMI would have recorded a loss of SGD39.5m. No dividend was declared, similar to the same period last year.

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Improvement across key segments

Flights handled at Changi by line maintenance improved 84% YoY/13% QoQ in 1HFY22/2QFY22, representing 25% of pre-pandemic workload. For base maintenance, the number of heavy and light checks performed at Singapore base jumped 92% and 49% respectively in 1HFY22 as flight activities returned. However, majority of these checks were of lighter work content due to younger fleet of the aircraft. Heavy checks at Clark base in the Philippines improved but continued to be affected by quarantine measures. Moreover, work volume for the fleet management business remained low due to low flight hours and retirement of customers’ older aircraft.

Higher fair value estimate of SGD2.68

Singapore is leading the reopening of Asian borders with its transition to “living with the pandemic approach”. Vaccinated Travel Lanes were expanded to 16 countries on the list currently. As travel curbs ease with higher vaccination rates, SIAEC is poised to benefit from a gradual recovery in travel demand. SIAEC is trading at forward price-to-book ratio of 1.66x, which is ~1 s.d. below its historical average of 2.28x. We find valuations undemanding. After adjustments, we raise our fair value estimate from SGD2.37 to SGD2.68.

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ESG Updates

SIA Engineering’s ESG rating was upgraded in Oct 2020. SIA Engineering scores better than its global peers in terms of environmental and social issues due to its strong efforts to mitigate adverse environmental impact of operations, and low injury and fatality rates. However, SIA Engineering’s corporate governance falls into the lower scoring range relative to its peers, due to concerns relating to the board and ownership structure. BUY. (Chu Peng)