1HFY24: Results In Line; Strong Underlying Demand Driving Improving Earnings
SIAEC’s 1HFY24 net profit of S$59m (+83% yoy) is in line with our expectation, at 49% of our full-year forecast. Underlying demand for MRO services remained strong, although earnings of the engine and component division were still somewhat hindered by supply chain issues. We expect SIAEC’s earnings to continue to improve in 2HFY24 and FY25, driven by further air traffic recovery and strong MRO demand in the medium term. Maintain BUY with an unchanged target price of S$2.67.
RESULTS
• Bottom line in line. SIA Engineering’s (SIAEC) 1HFY24 net profit of S$59m (+83% yoy) is in line with our expectations, forming 49% of our full-year forecast. 2QFY24 net profit of S$32m (+64% yoy) was an improvement over 1QFY24’s S$27m. 1HFY24 revenue rose 42% yoy to S$514m, driven by the recovery of regional flight activities and increased demand for line maintenance and MRO services.
• Operating profit behind our projections… 1HFY24 operating profit of consolidated entities was merely a breakeven, missing our expectations. The miss was due mainly to the still lossmaking position of the newly established engine and component division, whose performance: a) has yet to stabilise, and b) was adversely affected by the shortage of components related to sector-wide supply chain issues. In addition, 2QFY24 recognised an impairment loss of receivables of over S$2m, mostly related to MYAirline, which has suspended operations since mid-Oct 23. Excluding the impairment loss, SIAEC would have recorded a small positive operating profit in 2QFY24.
• …but the miss was offset by strong JV/associate contribution… The miss at operating profit level has been largely made up for by the stronger-than-expected contribution of JV/associate entities (mostly from the engine and component division), which recorded share of profits at S$50m (+21% yoy).
• …and higher net interest income earned from its net cash position. In 1HFY24, SIAEC recognised yoy higher net interest income of S$10.2m (1HFY23: S$2.1m), earned by its large net cash position (S$589m as at end-1HFY24, equivalent to 22% of its market cap) amid the higher interest environment.
• Interim dividend of 2 S cents. SIAEC resumed its interim dividend payment, declaring 2 S cents interim dividend for 1HFY24 (a 38% payout of 1HFY24 EPS of 5.3 S cents). Historically, SIAEC has had a practice of paying out smaller interim dividends but larger year-end dividends. We expect SIAEC to pay a full-year dividend of 8.5 S cents (about 79% payout), leading to a yield of 3.6% for FY24. We expect SIAEC’s dividend to improve further to over 5% in FY25-26.
STOCK IMPACT
• Continued recovery of flight activities at Changi Airport. Flight activities at Changi Airport (SIAEC’s home base) recovered to 89% of pre-pandemic levels in Sep 23. Based on our estimates, SIAEC commanded the lion’s 85% share of line maintenance business volume at Changi Airport in 2QFY24, higher than its typical 78-80% market share before the pandemic. SIAEC’s line maintenance business volume is expected to rise further in 2HFY24 and FY25, driven by increasing flight activities between Singapore and China and the rest of the world.
• Strong MRO demand. We expect underlying demand for MRO services to remain strong in the medium term, driven by: a) the robust post-pandemic recovery of flight activities, and b) airlines potentially keeping their older fleets (which require more MRO work) for longer due to expected delays in new aircraft deliveries by Airbus and Boeing as a result of supply chain issues including raw material and labour shortage.
• 49%-owned ESA to benefit from P&W’s accelerated inspection of GTF engines. Engine OEM P&W has recently announced the recall of about 3,000 geared turbofan (GTF) engines installed in Airbus A320neo aircraft for earlier-than-expected inspections for possible defects caused by contaminated metal powder used in the manufacturing process. This is estimated to drive 600-700 excess shop visits for the affected GTF engines in 2024-26, creating more work for P&W’s MRO network. Eagle Service Asia (ESA), a 51-49 JV between P&W and SIAEC (contributing 25% of SIAEC’s FY23 net profit) and one of the 13 existing GTF MRO engine centres globally, is set to benefit from increased engine inspection demand, although we are lacking details to assess the potential financial impacts.
EARNINGS REVISION/RISK
• No change.
• Key risks: a) margin pressure from labour and raw material cost inflation, and b) delay in project deliveries due to supply chain issues.
VALUATION/RECOMMENDATION
• Maintain BUY and target price of S$2.67. Our DCF-based target price is based on a WACC of 8.5% and a terminal growth rate of 2.5%. SIAEC is currently trading at 15.3x FY25F (normalised year) PE (or 11.9x if ex-net-cash).
SHARE PRICE CATALYST
• Re-rating catalysts for SIAEC include: a) continued recovery of earnings and dividend, and b) value-unlocking events that make better utilisation of its large cash pile, such as earningsaccretive acquisitions.
