SINGAPORE (Feb 11): Following a mixed set of results posted by SIA Engineering for 3QFY2020 ended Dec 31, analysts reckon that the company will face turbulence ahead given the outbreak of the novel coronavirus.
In particular, SIA Engineering could see a drop in business, similar to the impact seen during the severe acute respiratory syndrome (SARS) outbreak in 2003, warns OCBC Investment Research.
According to the brokerage, the company’s line maintenance and technical ground handling business saw a y-o-y revenue decline of 25% in FY2003.
Its airframe business also recorded a y-o-y revenue decline of 21% during the year.
“During the SARS period, [SIA Engineering]’s share price dropped 27% over a five-month period to the trough level in end-April 2003 and took another six months to recover back to pre-SARS level,” OCBC analyst Chu Peng writes in a note dated Feb 11.
As such, OCBC has lowered its revenue forecast for the company’s airframe and line maintenance businesses by 10% for FY2020 and 15% for FY2021.
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Meanwhile, UOB Kay Hian has lowered its FY2020 and FY2021 earnings forecasts by 1% and 4.2%, respectively, to account for the lower line maintenance revenue.
On Feb 7, SIA Engineering reported lower revenue of $252.1 million, down 1.5% y-o-y, during the quarter.
This came mainly on the back of lower airframe and line maintenance revenue, the company said.
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Earnings, however, surged 63.1% y-o-y to $54 million, due to higher contribution from its engine and component segment.
This was mainly due to the writeback of tax provisions, following the confirmation of tax concession granted for certain engine and component centres, said SIA Engineering.
The higher share of profits from associated and joint venture companies also helped to improve the company’s bottom line.
UOBKH, however, says that it is “slightly disappointed” by the “quality of earnings”.
This is because the company’s 9MFY2020 earnings amounted to 78% of its full-year estimates and 81% of street’s.
SIA Engineering warned that the operating environment has become more challenging, due to “the rapidly evolving novel coronavirus situation”.
This is in contrast to the company’s 2QFY2020 outlook guidance, which noted that its “transformational efforts [were] translating into improvement in operating performance”.
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“We believe that [SIA Engineering] is expressing concern over the steep cut in capacity by airlines and the impact on flight arrivals and hence line maintenance earnings,” UOBKH analyst K Ajith writes in a note dated Feb 10.
Still, there could be a silver lining for the company.
UOBKH believes that SIA Engineering could benefit from increased checks by airlines during the periods of low utilisation.
The brokerage expects the company to be free cash flow positive in 4QFY2020 as it is encouraged by the latter’s “strong” cash generation.
UOBKH has maintained its “buy” call for the stock with an unchanged target price of $3.13.
OCBC, however, has downgraded the stock to a “sell” recommendation and lowered its fair value estimate to $2.41 from $2.86 previously.
As at 12.52 pm, SIA Engineering was down 1 cent or 0.4% to $2.58, with some 356,400 shares changed hands.
