Where next for SIA Engineering's share price after posting higher profits?

Shares of the aviation engineering group opened higher despite the lowering of proposed dividends in its latest earnings.

Shares of SIA Engineering (SIAEC) Group opened 3.4% higher at S$1.84 per share on Monday 11 May 2020, after the group reported higher profits for the year ended 31 March 2020.

Higher net and operating profit for 2019/2020 financial year

SIA Engineering posted a net profit of S$193.8 million for its 2019/2020 financial year – 20.4% higher than the previous year, and an operating profit of S$67.7 million – 19.2% higher year-on-year.

The company attributed this growth to its transformation efforts, which has delivered improvement in manpower utilisation and reduced costs.

Group revenue came in at S$994.1 million, which was S$26.8 million (-2.6%) lower, mainly due to a S$23.7 million decrease in airframe and line maintenance revenue.

Expenditure decreased S$37.7 million (-3.9%) to S$926.4 million. In line with the lower workload, material and subcontract services costs decreased. In addition, staff costs and departmental costs also decreased (thanks to government support schemes), with exchange rate movement also in the firm’s favour.

Basic earnings per share was S$0.173 for the year, up from S$0.1438 the year before.

SIAEC Group’s Board of Directors has recommended a final ordinary dividend of S$0.05 per share for FY2019-2020, after considering ‘the profits earned during the year and the need to conserve cash given the severity of the COVID-19 pandemic and the uncertain recovery timeline’.

Together with the interim dividend of S$0.03 per share paid earlier, the total dividend payment for FY2019-20 will be S$0.08 cents per share. This is lower than the S$0.11 paid out in the previous financial year.

Payment of the final dividend, which amounts to approximately S$56.0 million, is subject to shareholders’ approval at the Annual General Meeting, to be convened at a later date. The dividend payment date will be announced at a later date.

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Assessment: Covid-19 has ‘significantly weakened financial position’

The group noted that the strong performance recorded in the first nine months of the financial year had continued into the last quarter, ‘until significant flight cancellations by airline customers severely impacted’ its line maintenance business in Singapore and overseas.

The impact on the group’s performance was most significant in March 2020, when the number of flights handled at its Singapore base dropped to only about 50% of our usual workload, the press release expounded.

Consequently, for the fourth quarter ended 31 March 2020, SIAEC Group posted a revenue of S$229.3 million, which was S$26.7 million (-10.4%) lower, due to a decrease in revenue from the airframe and line maintenance segment.

Revenues from fleet management were similarly impacted as they are based on flying hours, the company said. It added that while base maintenance unit and the engine and component segment were not immediately affected during the last quarter, they are expected to be affected going forward.

‘The pandemic has significantly weakened the financial position of our airline customers and original equipment manufacturer (OEM) partners and the near-term cash generation ability of our assets. We have taken a cautious approach in assessing these risks and provided for the necessary impairments based on our current assessments, but recognising however that these risks need to be constantly reviewed,’ the group stated.

SIA Engineering’s outlook for the rest of 2020

For the rest of 2020, the group has provided the following guidance:

‘The Covid-19 pandemic has an unprecedented adverse impact on the aviation industry and consequently on the MRO business without clear visibility on the timing of its recovery.

Border controls imposed by countries worldwide and the precipitous decline in travel demand has forced drastic cuts in flight capacities and grounding of aircraft. Changi Airport has reported that the number of scheduled flights for April 2020 is 96 per cent fewer than what was originally scheduled.

In response to the worsening crisis, the International Air Transport Association is projecting a more realistic U-shaped recovery for the air travel industry, with domestic travel coming back faster than the international market.

Against this backdrop, our performance will be adversely affected. Recovery of our core line maintenance business in Singapore will be directly dependent on the return of air traffic movement at Changi Airport. And for our overseas line maintenance stations, the return of air traffic movement at these airports.

While regulated mandatory aircraft checks are still ongoing, the reduction in flying hours and subsequent extended maintenance intervals will have an impact, albeit delayed, on our base maintenance unit and our joint ventures with engine and component OEMs.

In summary, the pace of recovery for our MRO business is unclear but is expected to be slow as it will depend on the improvement of the aviation industry.’

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