Analysts are overall optimistic on SIA Engineering (SIAEC) S59 , despite having a mixed bag of recommendations, as the group recorded a set of modest 1QFY2024 ended June results, which were largely in line with street estimates.
To recap, SIAEC on Jul 25 announced that its net profit came in at $27.0 million, some 111% y-o-y, while revenue increased by 52.7% y-o-y to $261.9 million. This improvement was driven by recovery of demand for line maintenance and maintenance, repair, and overhaul (MRO) services.
Operating profit was $0.4 million for the quarter, an improvement of $4.4 million y-o-y. It marks the first quarter of profit at the operating level since the onset of the pandemic in 4QFY2019. If the group excludes the impact of wage support recorded in the same quarter last year, operating performance improved by $13.0 million.
In 1QFY2024, the number of flights handled by SIAEC’s line maintenance unit in Singapore recovered to 84% of pre-pandemic volume, representing an increase of 69% year-on-year and 11% higher than last quarter.
See more: SIA Engineering Company reports 'more than double' y-o-y net profit of $27 million
Following the promising set of results, DBS Group Research and UOB Kay Hian have kept their “buy” calls at unchanged target prices of $2.80 and $2.67 respectively, whilst CGS-CIMB Research has maintained “hold” at a raised target price of $2.46.
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OCBC Investment Research Analyst Ada Lim has also kept “buy” with a higher fair value estimate (or target price) of $2.79 from $2.78 previously.
Meanwhile, DBS Group Research points out that SIAEC’s 1QFY2024 net profit more than doubled y-o-y, hence faring slightly better than expectations.
The analyst also notes that the group made further strides in the same quarter, expanding its geographical network and capabilities, increasing its stake to 55% from 45% in JAMCO Aero Design & Engineering, a one-stop cabin reconfiguration solution provider. A new joint venture (JV) agreement to form a line maintenance unit in Cambodia slated to be operational in 2025 was also signed between SIAEC and JAMCO.
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Another agreement to form a component MRO JV in Malaysia for aircraft components was also signed between the group and Eaton.
Although inflationary pressures and ongoing supply chain issues look to impede margin improvement in the near-term, DBS expects sustained momentum in global air traffic to drive both line and maintenance work volumes for the group and boost operating profits.
Additional contribution from SIAEC’s JVs and associates should continue to increase as engine and component MRO work activity look poised to rise due to technical issues, with new-generation engines and green-time engine reserves largely exhausted.
For the moment, UOB Kay Hian analyst Roy Chen has noted that the group’s 1QFY2024 results met expectations and formed 22% of his full-year forecast.
Chen likes the stock for its continued recovery of flight activities at Changi Airport. The local airport, which serves as SIAEC’s home base, has recovered to 82.2% of the pre-pandemic levels in June (averaging at 81.2% for 1QFY2024).
“Based on our estimates, SIAEC commanded the lion’s 84% share of line maintenance business volume at Changi Airport in 1QFY2024, higher than its typical 78%-79% market share before the pandemic,” says Chen, who expects SIAEC’s line maintenance business volume to rise further in the rest of FY2024, driven by increasing flight activities between Singapore and China and the rest of the world.
On the other hand, management has guided for a strong demand outlook for global air travel. While this bodes well for demand for MRO services, further recovery in MRO demand is expected to be at a slower pace than the rate of recovery over the past year, as airlines manage various constraints to return fully to pre-pandemic flight levels.
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Management also noted that the ongoing geopolitical tensions and macroeconomic uncertainties, inflationary pressure and supply chain disruptions present challenges to business recovery and operating margins. As such, the group would continue to focus on cost management while driving productivity and efficiency. Supply chain issues (component shortage) still linger in some of the group’s businesses, but the operational impacts are still manageable.
Importantly, Chen believes SIAEC’s balance sheet is “rock-solid”, with a net cash position of over $600 million as at end 1QFY2024, equivalent to about 23% of the group’s market cap.
OCBC analyst Ada Lim also has a positive outlook of the stock, citing the strong demand for global travel and MRO services as its driving factor.
Despite this, Lim expects challenges in the near term: “Persistent inflationary pressures and ongoing supply chain disruptions could continue to weigh on margins, at least in the near term. All things considered, we make minor adjustments to our forecasts. Our weighted average cost of capital (WACC) decreases from 7.5% to 7.1% on the back of lower equity risk premium assumption of 5.18% (as compared to 5.65% previously).”
Unlike the other analysts, CGS-CIMB analyst Kenneth Tan has maintained “hold”, citing the risk-reward as “fair” whilst raising the target price to $2.46 in the process.
Tan’s raised target price comes off a switch in valuation methodology from P/B to P/E as the group has achieved a turnaround in EBIT profitability.
The analyst points out that group Opex costs rose to $262 million in 1QFY2024, which was attributed to higher labour and material costs.
“Based on our estimates as SIAEC does not disclose quarterly staff costs, we think 1QFY2024 staff costs remained elevated at $141 million to $143 million or a rise of 57% to 60% y-o-y, forming around 54% of revenue, which is up from 1QFY2023’s estimated approximate 52% of revenue,” opines Tan.
The analyst attributes this to challenges faced in recruiting skilled workers in the aviation MRO industry.
He continues: “We expect FY2024 to FY2026 net margins to remain below pre-Covid levels at 10% to 12%, given elevated staff costs and tougher cost pass-through to airlines.”
Although SIAEC’s operating profit of $0.4 million is seen as a positive milestone, Tan believes that this was driven more from topline growth rather than an improving cost profile.
“In view of quicker topline recovery, we expect FY2024 revenue to exceed 95% of FY2018 levels against 85% previously, and raise our FY2024 to FY2026 revenue by 12% to 15%. We also expect the group to achieve FY2024 EBIT profit of $9.1 million,” says the analyst.
Upside risks include a quicker recovery in flight volumes and easing of labour cost pressures. Downside risks include lower travel demand from a global economic slowdown, and further margin erosion from rising staff and material costs.
As at 1:45pm, shares in SIAECare trading at 1 cent lower or 0.41% down at $2.44 on Jul 27.
