May 14, 2019

SIA Engineering Company (SIAEC) reported a 7.4% YoY fall in revenue to S$256m and a 12.3% decrease in net profit to S$49.3m for 4QFY19, bringing full year net profit to S$160.9m (-13.9% compared to FY18), which is just 2% higher than our full year forecast of S$158.2m. The lower revenue was mainly due to a decline in airframe and fleet management turnover. Share of profits of associates and JVs increased by 3.7% YoY to S$113.9m for the year.

Management commented that the MRO environment remains challenging. In addition, revenue will be impacted by the unforeseen grounding of customers’ aircraft. To minimise disruption of routes, certain other existing aircraft may be used to replace grounded aircraft and checks that were scheduled originally would be deferred. However, these have to be carried out eventually and SIAEC is working with its customers to minimise the impact of “bunching up” of work at the last minute.

Meanwhile, the group continues to extend its line maintenance network in different countries as it is envisioned that the number of heavy checks required by newer aircraft would decrease in the future while more line maintenance work would be done during any spare downtime that is available for aircraft. Among the 34 stations that SIAEC currently has in various countries, there are three in Japan where the group has started expanding its presence. SIAEC also recently announced their plans to extend the line maintenance network to Thailand, in partnership with NokScoot Airlines. The group is not limited by the base-load of its airline partners, as it also hopes to get third party work.

SIAEC’s transformation journey is gaining traction with some initiatives generating productivity gains and added capacity for growth. More of such initiatives will be progressively implemented over the next three years. We maintain our HOLD rating but our fair value estimate is lowered slightly from S$2.47 to S$2.43. – OCBC Investment Research

SIA Engineering closed at: S$2.42