CGS-CIMB Research has kept its “hold” call on SIA Engineering (SIAEC) with an increased target price of $2.51 from $2.46 previously, while UOB Kay Hian has maintained its "buy" call at an unchained target price of $2.67, following the group’s 1HFY2024 results ended Sept 30.
In their Nov 3 report, CGS-CIMB analysts Kenneth Tan and Lim Siew Khee write that SIAEC’s current valuation appears fair at 20x its calendar year (CY) 2024 price-to-earnings ratio (P/E), which is near the FY2014 to FY2019 average.
SIAEC’s 1HFY2024 net profit of $59 million showed a 75% increase h-o-h and 83% increase y-o-y, which was largely in-line with expectations, forming 52% of the analyst’s forecast and 50% of Bloomberg’s consensus FY2024 forecast.
Excluding the around $2 million in one-off debt impairment provision, 1HFY2024 core earnings before interest and taxes (ebit) improved to $2.4 million on improved operating leverage, as compared to the $10.8 million loss in 1HFY2023.
Tan and Lim note: “Both revenue which was 18% higher h-o-h and 42% y-o-y and share of associates’ profits which was 37% higher h-o-h and 21% higher y-o-y grew robustly on the back of increased maintenance, repair, and overhaul (MRO) demand across the region.”
An interim dividend per share (DPS) of two cents DPS was proposed, the first interim issuance since 1HFY2020.
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Meanwhile, Tan and Lim observe that staff cost pressures look likely to continue into FY2025.
“Staff costs rose to a record high of $280 million which is an increase of 46% y-o-y in 1HFY2024, which we think reflects ongoing challenges faced in recruitment due to the high demand for skilled engineers and technicians, and cost pass-through to airlines,” writes the team of analysts.
Correspondingly, SIAEC intends to tackle the problem via productivity gains realised from digitalisation, and the building up of a talent pipeline through schools and government agencies.
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Tan and Lim expect FY2024 to FY2025 staff costs as a percentage of revenue to remain elevated at 54% to 55%, compared to FY2017 to FY2019’s average of 46%. He writes: “We think it will take time for management initiatives to translate into meaningful operating margin improvements.”
Regarding the widespread recall of engine manufacturer Pratt and Whitney’s geared turbofan (GTF) engines, Tan and Lim note that this could drive increased work volumes for SIAEC’s 49%-owned joint venture (JV) Eagle Services Asia (ESA) over FY2024 to FY2026.
“Management confirmed our thesis, as the group expects more engine inductions for ESA in the coming quarters, given its positioning as the largest GTF engine MRO provider in Southeast Asia. Based on our preliminary estimates, we think the FY2024 to FY2026 share of profits from ESA could see uplifts of $5 million to $8 million, and we raise our FY2024 to FY2026 earnings per share (EPS) by 2% to 7% accordingly,” note the analysts.
Their new target price is still based on a P/E multiple of 22x for CY2024, but is now higher due to their higher EPS estimates.
Further to their report, Tan and Lim understand that upside risks include a strong surge in profits from ESA and easing of labour cost pressures, while downside risks include lower travel demand from a global economic slowdown impacting MRO volumes, and further margin erosion from rising staff and material costs.
Meanwhile, UOB analyst Roy Chen notes that flight activities at Changi Airport, which is SIAEC's home base, has recovered to 89% of pre-pandemic levels in September.
He writes: "Based on our estimates, SIAEC commanded the lion’s 85% share of line maintenance business volume at Changi Airport in 2QFY2024, higher than its typical 78% to 80% market share before the pandemic. SIAEC’s line maintenance business volume is expected to rise further in 2HFY2024 and FY2025, driven by increasing flight activities between Singapore and China and the rest of the world."
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The analyst also expects the underlying demand for MRO services to remain strong in the medium term, driven by the robust post-pandemic recovery of flight activities, and airlines potentially keeping their older fleets 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.
Key risks noted by Chen include margin pressure from labour and raw material cost inflation and delay in project deliveries due to supply chain issues, while re-rating catalsysts include the continued recovery of earnings and dividend, as well as value-unlocking events that make better utilisation of SIAEC's large cash pile, such as earnings accretive acquisitions.
As at 4.40pm, shares in SIAEC are trading at 1 cent lower or 0.42% down at $2.37
