FY22: Results In Line; Expecting Stronger FY23 Driven By Accelerated Recovery
SIA Engineering’s FY22 revenue of S$566m and headline net profit of S$68m were in
line with our full-year forecasts. Business recovery picked up in 2HFY22 and
particularly towards the end of FY22. We are looking at an even faster pace of recovery
from the start of FY23 given that the positive impact from Singapore’s border measure
relaxations is expected to kick in from Apr 22 onwards. Maintain BUY with unchanged
target price of S$2.90. SIA Engineering is our top sector pick.
RESULTS
• Results in line. SIA Engineering reported FY22 net profit of S$67.6m, vs S$11.2m net loss
in FY21. The improvement was achieved despite a significant reduction in government wage
support during the year. Excluding the impact of wage support and adjusted for other major
one-off items (impairments, disposal gains, tax provision writebacks, etc), SIA Engineering
would have registered a S$50m net loss by our estimate, representing a significant
improvement against the S$141m net loss in FY21 on the similar adjusted basis. Revenue
rose 28% yoy to S$566m in FY22 (FY21: S$443m)
• Recovery momentum picked up in 2HFY22 and towards the end of FY22. Operating
loss (excluding wage support) narrowed to S$37m in 2HFY22, from S$62m loss in 1HFY22
and S$69m loss in 2HFY21. JV and associate contribution also improved significantly,
though it was partially helped by a sizeable tax provision writeback (the amount was not
disclosed but we believe it could be in the north of S$20m). Management confirmed that
even without the tax writeback, the JV and associates’ performance still improved
meaningfully in 2HFY22, driven by the recovery in engine and component service volume.
SIA Engineering’s quarterly core net losses have been consistently narrowing, to only a tad
negative of S$4m in 4Q22 (3Q22: S$7m loss) by our estimate.
• Rock solid balance sheet. As at end-FY22, SIA Engineering had a considerable net cash
position of S$623m, equivalent to 21% of its market cap.
• No dividends declared for FY22. This is expected as SIA Engineering was still receiving
substantial government wage support in FY22, without which the group would have reported
a net loss.
STOCK IMPACT
• Expect accelerated recovery ahead, starting from April. Statistics of flight activities at
Changi Airport and operating data of Singapore Airlines had picked up remarkably in March.
Coming into April and May, the recovery momentum can only be stronger with the tailwinds
from Singapore border relaxations (since April) and a number of public holidays and long
weekends in May. April aviation data from various public sources support our case of an
accelerated recovery. According to SIA Engineering’s inhouse statistics, its line maintenance
business volume had recovered to 45% of the pre-pandemic level in April, compared to 38%
in March and FY22 full-year average of 29% (see figure next page).
• Core earnings likely to turn positive in 1QFY23. Given that SIA Engineering’s core
earnings (ie net profit adjusted for government wage support and one-off items) was only a
tad negative in 4QFY22 and in view of the accelerated recovery in the coming quarter, we
believe SIA Engineering’s core profitability would return to the positive territory in 1QFY23.
The government wage support, which had already been reduced to a very subdued level in
4QFY22, is slated to end in Jul 23.
• Ramping up recruitment in preparation for faster recovery. Management shared that one
of the company’s priorities in FY23 is to ramp up manpower recruitment in preparation for
further flight recovery. While this might create some short-term mismatch between revenue
recovery and cost build-up, it would not change our base case of an overall strong recovery
in FY23.
EARNINGS REVISION/RISK
• We trim our FY23 net profit forecast by S$10m to reflect a slightly faster manpower ramp-up.
Our new FY23 net profit forecast of S$92m is still S$24m or 35% higher than FY22 reported
net profit of S$68m as we expect the business recovery to more than offset the reduction in
government support. Our FY24-25 forecasts remain intact.
VALUATION/RECOMMENDATION
• Maintain BUY and DCF-based target price of S$2.90. SIA Engineering remains our top
sector pick. It is currently trading at 15.7x FY25F (normalised year) PE (only 12.3x if ex-netcash) which is at 2.0SD below its FY14-19 (pre-COVID-19 years) average PE of 23.2x. The
15.7x PE or 12.3x ex-net-cash PE are undemanding in our view, considering SIA
Engineering’s strategic position, especially its line maintenance business’ market leadership
(78% market share) in the international air hub Singapore.
SHARE PRICE CATALYST
• Core earnings recovery. We believe the market should turn more positive on SIA
Engineering for its core profitability recovery and further improvement. We also expect FY23
to be the year that SIA Engineering resumes dividend payment.
• Pressure to do something with its big cash pile. SIA Engineering has a sizeable net cash
position of S$623m on its balance sheet earning non-meaningful interest income (only S$1.8
in FY21, equivalent to 0.3% interest rate); this is in contrast to its 77.6% controlling
shareholder Singapore Airlines’ (SIA) huge cash needs to pay off the expensive Mandatory
Convertible Bonds (MCB) bearing compounded finance cost of 4% (to step up to 6% with
later redemptions). As such, we believe that SIA Engineering would be under pressure to
make utilisation of the cash pile to either:
a) dividend the cash out to shareholders – in this way, more cash would be channelled back
to SIA for the parent company to pay for the expensive MCBs; or
b) utilise the cash for some sizeable acquisition, which should at least beat the parent
company SIA’s MCB finance cost of 6%. In that case, a S$600m acquisition could mean
additional net profit of S$36m at the steady state, equivalent to 20% of our FY25 net profit
forecast of S$188m.
Either way is a good value-unlocking event for shareholders.