1QFY23: Results In Line; Profitable Even Without Government Support
1QFY23 marked the first quarter that SIAEC returned to positive core profitability excluding government support. 1QFY23 ex-relief core net profit of S$4.2m is a good start and we expect SIAEC’s profitability to continue to improve for the rest of FY23, driven by the rising flight activities at Changi Airport. With the positive core profitability and SIAEC’s strong balance sheet, we expect a meaningful recovery in dividend
payment in FY23. Maintain BUY and unchanged target price of S$2.70.
• Results in line. SIA Engineering’s (SIAEC) 1QFY23 headline net profit of S$12.8m (1QFY22: S$14.5m) was broadly in line with our expectations, at 14% of our FY23 full-year forecast of S$92m. Revenue rose 36.9% yoy (+5.5% qoq) to S$171.5m (about 66% of the pre-pandemic levels), driven by the increase in line maintenance revenue from higher number of flights handled. Opex rose at a similar pace to S$175.5m, partly due to reduction in government wage support. Excluding the impact of government support, opex rose 19.3% yoy, slower than the revenue growth. Operating profit was still a tad negative at S$4.0m in 1QFY23, but the small loss was more than covered by the S$16.4m profit contribution from JVs/associates (mainly in the engine and component segment).
• First quarter of positive core profitability without government support since onset of pandemic. It is particularly encouraging that SIAEC had returned to positive core profitability in 1QFY23. Taking out the government support, SIAEC recorded positive core net profit of S$4.2m in 1QFY23, compared with a core net loss of S$24.1m a year ago. Apart from the upbeat service volume recovery, we believe SIAEC’s relatively faster return to profitability vs other aviation plays was also attributable to its high staff retention during the pandemic, which allows SIAEC to quickly ramp up its operations to meet the air travel recovery without aggressively raising headcounts.
• Rock solid balance sheet. As of end-1QFY23, SIAEC had a considerable cash balance of S$603m with little debt. We estimate SIAEC’s net cash position is equivalent to over 20% of its market cap.
• Good visibility of business recovery. 1QFY23 marked a good start for the year and we expect SIAEC’s core profitability to continue to improve for the rest of FY23, driven by the increasing flight activities at Changi Airport. As of Jun 22, the number of flights handled by SIAEC had recovered to about 55% of pre-pandemic levels and we expect this figure to rise further to about 80% by Dec 22, noting that SIAEC’s parent company Singapore Airlines (SIA) has a plan to recover its passenger capacity to 81% by Dec 22 (about 70% of SIAEC’s revenue was derived from SIA in FY21-22; this was compared with the 40-45% level before the pandemic).
• Expecting a meaningful recovery in dividend this year. Being a know-how-based and largely asset-light business without heavy capex, SIAEC used to pay out 75-80% of its net profit as dividend. The company ceased paying dividend in FY21-22 when it was lossmaking without government support. Now that the company has returned to profitability without government support, we believe SIAEC is likely to resume dividend payment within FY23. We are forecasting a dividend of 6 S cents per share by applying a 75% payout ratio to our FY23 EPS forecast of about 8 S cents, while not ruling out the possibility of a special payout, considering that SIAEC’s net cash position had in fact strengthened during the pandemic years and that its parent company SIA has cash needs to retire its Mandatory Convertible Bonds.
• No change.
• Key risks for SIAEC include: a) increasing competition for manpower (higher retention cost for engineers), b) failure to pass down rising costs in an inflationary environment.
• Maintain BUY and a DCF-based target price of S$2.70. SIAEC is our top pick among the Singapore aviation plays. We like SIAEC for: a) the good visibility of its business recovery, b) its local market leadership (78% market share of Changi Airport line maintenance business volume), and c) still cheap valuation – SIAEC is currently trading at 14.6x FY25 (normalised year) PE (about 11.5x if ex-net-cash), 2.3SD below its FY14-19 (pre-COVID-19 years) average PE of 23.2x.
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• We believe market should turn more positive towards SIAEC with the core profitability recovery. Re-rating catalysts for SIAEC include: a) further core earnings improvement and dividend resumption, and b) SIAEC making good utilisation of its big cash pile for some sizeable acquisition or paying special dividend.