3QFY22 shows sequential improvement as expected, stands to benefit from borders reopening
- Line maintenance volumes continue to recover with 17% q-o-q growth in 3QFY22
- Excluding one-offs, core net loss of S$7m in 3QFY22 continues trend of sequential improvement in earnings
- Easing of travel curbs in Singapore and border reopening in the region should lead to higher flight activity from 2Q2022 onwards, supporting SIE’s growth trajectory in FY23/24
- Strong net cash position an added plus in current environment, maintain BUY with TP of S$2.65
Tax writebacks boost 3QFY22 earnings performance. SIA Engineering reported headline net profit of S$33.2m, but this includes government wage support grants and a substantial chunk of one-time writeback of tax provisions by certain associated companies. Excluding those, the Group would have reported a core net loss of S$7.0m in 3QFY22. This compares favourably with core net loss of S$24.1m in 1QFY22 and S$15.4m in 2QFY22, and continues the trend of sequential improvement. For 1H22, SIE had recognised S$64.5m in jobs support scheme grants, and we estimate grants totalling around S$85-90m for the full year FY22, thus 2HFY22 will have less support from grants and more impact from improving core operations. 3QFY22 revenue came in at S$140m, up 34% y-o-y and 1% q-o-q, mainly on the back of higher line maintenance activities. Results are largely in line with expectations, save for the one-off items.
Work volumes continue to improve slowly. The number of flights handled in Changi Airport by SIE’s line maintenance unit in 3QFY22 was up 65% y-o-y and 17% q-o-q, as flight activities picked up after the launch of more vaccinated travel lanes (VTLs) in Singapore in 4QCY21. However, flight numbers still remain subdued compared to pre-COVID levels, as flight movements at Changi Airport during 3QFY22 (4QCY21) were down 66% compared to 2019 levels. At the base maintenance division, SIE saw some improvement in hangar utilisation, but work content of these checks was lighter as a higher proportion of the checks performed were for young new-generation aircraft. Core operating loss was S$7.8m in 3QFY22, which is higher loss compared to last 2 quarters, but includes lesser quantum of government grants, so actually represents a better core operating performance. The pace of core operating turnaround will depend on how fast line maintenance segment volumes recover hereon. Share of associate/ JV contributions came in at S$40.1m in 1QFY22, up significantly compared to S$12-15m contribution run rate in preceding quarters, owing to the tax write back mentioned earlier. Exact quantum of the tax writeback has not been disclosed. Management indicated that engine JVs are benefiting from the recovery in flight activities, with total engine inductions and shipments at engine JVs only about 25% below the pre-pandemic levels. This is an encouraging sign, and JV/ associate contributions should recover faster than core operations, given a more global exposure.
Company operating statistics at the Singapore base
| 1QFY21 | 2QFY21 | 3QFY21 | 4QFY21 | 1QFY22 | 2QFY22 | 3QFY22 | y-o-y change | q-o-q change | |
| Flights handled at Changi Airport by line maintenance | 4,952 | 6,320 | 7,807 | 8,648 | 9,755 | 10,990 | 12,860 | 65% | 17% |
| Number of heavy checks performed at Singapore base | 15 | 9 | 16 | 20 | 21 | 25 | 25 | 56% | 0% |
| Number of light checks performed at Singapore base | 54 | 55 | 53 | 61 | 85 | 77 | 92 | 74% | 19% |
| Fleet size managed by fleet management business | 86 | 82 | 79 | 80 | 79 | 77 | 76 | -4% | -1% |
New facilities and capabilities coming onstream. Earlier in 2022, SIAEC announced the start up of the Engine Services Division in Singapore with an investment of S$9m to provide engine maintenance services to Safran Aircraft Engines (SAE). The facility will provide Engine Quick Turn (QT) and modification embodiment services for both CFM LEAP-1A and LEAP-1B engines at this engine shop. The CFM LEAP engines are the next-generation engines replacing the matured V2500s1 and CFM56s, which power most of the narrowbody fleet today. LEAP-1A engines are used for the Airbus A320neo while LEAP-1B engines are used for the Boeing 737 MAX, both next-gen narrow body aircraft with significant orderbooks. We believe this should be a good investment for the future, as while the current facility is dedicated to serving SAE currently, capabilities can be extended to serve a wider market in future. SIAEC has also announced acquisition of 75% stake in SR Technics Malaysia (remaining will be held by SR Technics) for S$3.75m in cash to form a component MRO joint venture (JV). The JV broadens the range of component repair capabilities and will complement SIAEC’s existing component repair and overhaul services and fleet management programmes.
Further easing of travel curbs in Singapore is a welcome relief for SIE. The Singapore government recently announced that it plans to substantially loosen travel restrictions and relax domestic COVID-19 measures after Omicron peaks, demonstrating the government’s commitment to reopening and enabling Singapore to shine as an aviation and business hub. Other countries in the region like Australia, Malaysia, Vietnam, the Philippines and Indonesia are also reopening their borders in the near future, which is crucial given that a large number of tourist that visit Singapore typically have multi-country itineraries in Asia. Simplified testing requirements and streamlining of border restrictions to include fully vaccinated non-VTL travellers will accelerate the inflow of tourists. We expect the pandemic situation to peak by 1QCY22, and we should see a swift rebound in both inbound and outbound flight activity from 2QCY22. Overall, the pace of countries reopening in Asia is progressing faster than our expectation. Asia has been a key outlier and a laggard to the other regions but we should finally see air travel in the region trending higher as more countries begin to relax border controls. Hangar activity levels for MRO operators will rise as airlines return more aircraft into service. All eyes though will still be on China’s COVID-19 policy and reopening trajectory, given that 40% of intra-APAC travel involves the country in some form, so if and when China decides to open up, that would be a key catalyst for the airline and aviation services. Thus, we believe the reopening trajectory should continue to benefit SIE’s work volumes and core operations in 4QFY22 and FY23, and help offset the tapering of jobs support scheme grants. No changes to our numbers for now.
Immune from interest rate hike cycle, SIE remains a good play on border reopening. SIE continues to remain at a robust net cash position of more than S$600m, and could potentially deploy its capital to bolster its presence in new growth areas. More importantly, SIA Engineering stands to benefit rather than lose in the current interest rate hike cycle, and also benefit from the underlying growth and recovery which is partly driving the rate hike cycle. Optimism on recovery prospects have increased from launch of further easing of travel curbs in Singapore, as outlined above. We believe recovery of air travel over next 2 years should lead to strong earnings rebound in FY23/24 and dividends should be restored from FY23 onwards. Maintain BUY with TP of S$2.65