SIA Engineering can't shake off cost pressures and margin concerns

Risks of margin erosion and prolonged aviation sector weakness continue to weigh down the firm's earnings potential, says Maybank Kim Eng.

"In our previous note, we had highlighted our concerns of margin erosion and a delayed recovery in the aviation sector as key risks for SIE. These risk factors are still largely prevalent, with higher subcontract, staff and material costs being cited by SIE as main contributors to its 9.6% YoY increase in operating expenditure for 1QFY3/13," said Maybank Kim Eng in a results report.

On the other hand, it also noted the relative resilience of SIA Engineering due to its strong balance sheet and net cash position.

"Supported by positive MRO macro outlook. Amidst a possible delay in an aviation sector-wide recovery, the MRO segment remains relatively resilient, with a ~4% CAGR growth forecasted globally for the next 5 years. 1H2012 aircraft movement at Changi Airport has also maintained strong growth of 10.2% YoY (Fig 3), offering further growth support for SIE on a domestic front. SIE’s strong balance sheet with its net cash position of SGD 572 m and healthy cash-generating business (1QFY3/13 net cash inflow of +SGD 75.9 m) should continue
to support a steady, growing dividend payout," said Maybank Kim Eng.