Analysts have kept their “buy” calls on SIA Engineering (SIAEC) even though its results for the 3QFY2023/2024 ended Dec 31, 2023, stood lower than expected.
For the quarter, SIAEC’s earnings stood at $26.9 million, 110% higher compared to 3QFY2022/2023’s $12.8 million. Its revenue improved by 40.2% y-o-y to $291.7 million. At the same time, the company’s expenditure experienced a comparatively lower increase of 33.8% y-o-y, totaling $295.1 million, which was primarily attributed to higher manpower and material costs.
Due to the fact that the growth in revenue outpaced the rise in expenditure, SIAEC recorded a reduced operating loss of $3.4 million compared to the $12.5 million operating loss in the same period.
Excluding the impact of foreign exchange (forex) losses, the company would have achieved an operating profit of $0.5 million.
See more: SIA Engineering Company reports 3QFY2023/2024 net profit of $26.9 mil, double y-o-y
UOB Kay Hian analyst Roy Chen has also kept his target price unchanged at $2.73 even though SIAEC’s net profit for the period “came in below” his guided range of $32 million to $35 million. The missed earnings was attributed to the company’s “sizeable” forex loss of $3.9 million and the cost inflation of labour and raw materials.
“We note that the forex loss was mostly, if not all, paper loss related to the weakened US dollar against the Singapore dollar during the quarter, as SIAEC holds part of its cash balance in US dollars for working capital purposes. Since the US dollar has rebounded against the Singapore dollar in early-2024, we see a chance that a major part of the paper loss seen in 3QFY2024 could be reversed in 4QFY2024,” says Chen in his Feb 16 report.
Meanwhile, Chen also understands that profit contribution from the company’s joint ventures (JV) and associate entities stood at $23.8 million in 3QFY2024, a 23% y-o-y improvement but a 15% dip q-o-q, adding that due to the “lumpy nature” of project revenue recognitions by these engine and component JVs, “some extent” of fluctuations in SIAEC’s quarterly earnings delivery is within his expectations.
“As of end-December 2023, SIAEC has a cash balance of $579 million, a minor decline from $594 million a quarter ago due mainly to the $22 million interim dividend paid. SIAEC’s net cash position forms about 22% of its current market cap, by our estimate,” notes the analyst.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
With flight activities at Changi Airport recovering to 91.2% of pre-pandemic levels in December 2023, line maintenance business volume handled by SIAEC recovered faster, having reached 94% of the pre-pandemic levels in the same period.
Chen adds that the company’s share of line maintenance business volume at Changi Airport stood at 85.3% in 3QFY2024, compared with the pre-pandemic’s 83.3% in 3QFY2020, writing: “We expect SIAEC’s line maintenance volume to rise further in the remaining FY2024 and FY2025, driven by increasing flight activities between Singapore and China and the rest of the world.”
Similarly, the analyst expects underlying demand for maintenance, repair and overhaul (MRO) services to remain “strong in the medium-term”, driven by the post-pandemic recovery of flight activities, and airlines favouring older fleets due to delays in new aircraft deliveries by Airbus and Boeing from supply chain issues and the questionable reliability of certain newer aircraft models.
Meanwhile, Chen notes that he has yet to see SIAEC’s 49%-owned subsidiary, Eagle Services Asia (ESA), benefit from aerospace engine manufacturer Pratt and Whitney’s (P&W) recall of geared turbofan (GTF) engines for inspections.
While he lacks “sufficient clarity” to “reliably estimate” the positive earnings impact from the additional GTF engine inspections and services, Chen’s best estimate is that the positive earnings impact for SIAEC could be in the range of high-single-digit to low-teens millions per annum (p.a.) for two to three years.
Overall, Chen still remains buoyant on SIAEC’s prospects, saying that the company’s valuation is “palatable” at 15.0 times FY2025 P/E or 11.6 times excluding net cash.
“We remain hopeful that SIAEC’s earnings would improve further moving forward but note that the supply chain issue may add some uncertainty to that trajectory,” he writes.
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OCBC Investment Research analyst Ada Lim also notes SIAEC’s slightly weaker 3QFY2023/2024 on the back of forex headwinds, although she sees the company’s underlying recovery as “intact”.
That said, the “path ahead will not be without” challenges, she says.
According to her, while the company’s operating metrics have been robust in tandem with the recovery of global flight activities, she adds that SIAEC continues to “prioritise cost management” and growing its capabilities.
“During the quarter, it further expanded its portfolio through the acquisition of an additional 10% stake in JAMCO Aero Design & Engineering Private Limited, bringing its total stake to 55%, as well as the leasing of two hangars at Sultan Abdul Aziz Shah Airport, Selangor, Malaysia, for a period of 15 years, which will expand its capacity by six simultaneous aircraft checks,” writes Lim.
Potential catalysts noted by her include quicker-than-expected easing of cost pressures, while investment risks include lower air travel and hence MRO demand, the reduction in dividends, and lastly, SIAEC “significantly dependending” on its parent company, Singapore Airlines C6L , for maintenance jobs.
As at 4.20 pm, shares in SIA Engineering are trading at two cents lower or 0.85% down at $2.33 on Feb 19.
