SIA Engineering’s (SIAEC) S59 results for 3QFY2023 ended December were below expectations, says UOB Kay Hian Research analyst Roy Chen. While the aircraft maintenance, repair and overhaul operator is on a recovery trend, cost pressure remains, adds Chen.
SIAEC’s 3QFY2023 headline net profit of $12.8 million, down 35% q-o-q was a miss, notes Chen, likely due to a faster ramp-up of manpower cost and forex losses. “While we expect SIAEC’s profitability to continue to recover ahead, the manpower cost ramp-up may remain somewhat a drag in the near term.”
In a Feb 20 note, Chen maintains “buy” on SIAEC with a lower target price of $2.67 from $2.70 previously.
SIAEC’s 3QFY2023 and 9MFY2023 figures formed 15% and 54% of UOBKH’s FY2023 net profit forecasts respectively.
“Without the benefits of a more detailed financial disclosure from the company, we believe the miss is likely mainly due to faster-than-expected increase in manpower cost (driven by higher headcount, cessation of cost mitigation measures and increments), and a sizeable forex loss (amount not disclosed),” notes Chen.
Excluding the impacts of government grants and a significant one-off tax provision writeback in 3QFY2022, 3QFY2023 net profit improved $19.8 million y-o-y.
See also: SIA Engineering Company reports 61.4% lower 3QFY2022/2023 net profit of $12.8 mil
Revenue performance was broadly in line with UOBKH’s projection, rising 9.1% q-o-q and 48.6% y-o-y to $208 million in 3QFY2023, driven by growth across all business segments on the back of higher business volumes.
Meanwhile, share of profits from joint ventures (JVs) and associates in 3QFY2022 had benefited from a significant one-time tax provision writeback of $21.5 million. “Excluding this exceptional item, share of profits from JVs and associates rose by a marginal $0.7 million y-o-y to $19.3 million in 3QFY2023, driven by higher contribution from the airframe and line maintenance segment, partly offset by lower contribution from the engine and component segment,” notes Chen.
Riding the recovery
With about 80% share of Changi Airport’s line maintenance business volume, SIAEC is a key beneficiary of the rising flight activities at Changi Airport, which recovered to 76.2% of the pre-pandemic levels in December 2022, says Chen.
“Looking ahead, we expect flight activities at Changi Airport to continue to recover and to reach about 93% of the pre-pandemic levels by end-2023, driven by the increasing flight frequencies between Singapore and China and the rest of the world,” he adds.
According to management, the reopening of China’s borders is a positive development for a faster and full recovery of the aviation industry. However, challenges remain in the recovery path with risk of global recession, inflationary pressures, supply-chain disruptions and geopolitical uncertainties, says Chen.
In addition, cost pressure remains a drag, writes Chen. “We think that the cost pressure could remain a key dampening factor in SIAEC’s profitability performance during the recovery journey, as the company proactively ramps up resources ahead of business volume growth.”
Chen lowers his FY2023/2024 earnings per share (EPS) estimates by 22.6%/11.8% to reflect the results miss as well as to build in a faster cost ramp-up.
As at 3.57pm, shares in SIAEC are trading 6 cents lower, or 2.63% down, at $2.22.
