Friday, November 22nd, 2024

SIA Engineering Reports Strong MRO Demand and Revenue Growth in H1 2024




Comprehensive Analysis of Key Singapore Stocks

Comprehensive Analysis of Key Singapore Stocks

Date: 6 November 2024

Broker: Lim & Tan Securities

SIA Engineering

SIA Engineering, trading at \$2.49, reported a healthy demand for maintenance, repair, and overhaul services (MRO) in the first half of the financial year ending 30 September 2024. All operating segments recorded higher revenue. Group revenue grew by 12.1% year-on-year to \$576.2 million, while Group expenditure increased at a lower rate of 11.5% to \$572.8 million. This rise in expenditure was mainly due to higher material, manpower, and repair costs, including an exchange loss compared to an exchange gain in the previous period. Consequently, the Group’s operating performance improved by \$3.3 million year-on-year to an operating profit of \$3.4 million.

The share of profits from associated and joint venture companies also increased by \$8.6 million (+17.2%) year-on-year to \$58.6 million. The Group’s net profit for the first half ended 30 September 2024 was \$68.8 million, an improvement of \$9.5 million year-on-year. An interim dividend of 2.0 cents per share was declared and will be paid on 29 November 2024.

For the second quarter, the Group recorded an operating profit of \$2.4 million, an improvement of \$2.7 million year-on-year as revenue growth of 22.0% outpaced the 20.9% increase in expenditure. Expenditure increased mainly due to higher material costs, staff costs, subcontract costs, and an exchange loss compared to a comparative period’s exchange gain.

Line Maintenance demand across the Group’s network continued to increase year-on-year. In Singapore, 9% more flights were handled compared to the same period last year. At the end of September 2024, the number of transits handled was 95% of pre-pandemic volume, compared to 89% a year ago. Fewer aircraft checks were completed at Base Maintenance’s Singapore hangars in the first half of the financial year ended 30 September 2024 due to a higher mix of legacy aircraft checks with heavier work content as well as cabin refurbishments. Preparation work for Base Maintenance Malaysia is on track, with the first of two hangars in Subang scheduled to begin operations in the second half of 2025.

The Group will incur associated start-up and development costs over the next two to three years due to investments for business expansion in terms of capacity, geographical reach, and repair capabilities to position for long-term growth. MRO demand continues to be driven by healthy air travel demand. Additionally, delays in the delivery of new aircraft have resulted in airlines keeping older aircraft in operation and needing MRO support. However, the industry continues to face pressures from supply chain constraints, rising costs, tight manpower supply, and heightened geopolitical tensions. SIA Engineering remains a beneficiary of an increase in MRO services from healthy air travel demand, trading at 18x forward P/E, 1.7x P/B, and a dividend yield of 3.2%. The consensus target price stands at S\$2.68, representing an 8% upside from the current share price. Recommendation: “Accumulate on Weakness.”

Elite UK REIT

Elite UK REIT, trading at GBP 0.30, reported a portfolio revenue of £28.0 million in 9M2024, while distributable income increased by 2.8% year-on-year to £14.0 million. After adjusting for an enlarged equity base of 594.2 million units in issue following a £28 million preferential offering in January 2024, 9M 2024 DPU of 2.13 pence was 3.9% higher compared to 9M 2023 DPU, due to higher distributable income and tax savings.

CEO Joshua Liaw stated, “We are firing on all cylinders.” On capital management, significant progress was made in refinancing, hedging, and completing dilapidation settlements negotiations for vacant assets. On asset management, lease renewal for Theatre Buildings in Billingham used as a DWP Jobcentre Plus was completed, and Sidlaw House in Dundee was divested, indicating strong investor demand for well-located UK properties.

Since the start of 2024, the Manager concluded dilapidation settlements of £1.4 million for vacant assets. On 7 October 2024, the REIT announced the divestment of Sidlaw House, Dundee at £1.3 million, approximately 42% above its valuation as of 30 June 2024. The Manager has received offers for other vacant assets at favorable valuations, with more information to be provided upon transaction completion.

Elite UK REIT submitted a planning application for an 80-megawatt data center campus at Peel Park, Blackpool, co-located with existing buildings utilized by the DWP. This potential data center campus will have access to renewable power supplies from the local grid and offshore windfarms, leveraging Blackpool’s strategic location and subsea cable connections to Dublin, Europe, and North America. The Manager is evaluating strategic options for Peel Park and several assets within the portfolio, collectively valued at £40.2 million, to maximize long-term value for unitholders, including strategic divestment, partnerships, redevelopment, or disposal with approvals.

Engagement with tenants to extend and diversify leases ending in 2028 continues. All leases are on a triple net basis, with almost 100% of rent for the period of three months to 31 December 2024 collected in advance. Following the Sidlaw House divestment, portfolio occupancy increased to 93.9% as of 7 October 2024, from 92.3% as of 30 June 2024, with a WALE of 3.5 years as of 30 September 2024.

As of 7 October 2024, Elite UK REIT’s net gearing ratio stood at 43.6%. Borrowing costs declined by 20 basis points to 5.0% from 5.2% as of 30 June 2024 through refinancing and hedging 87% of exposure, with an interest coverage ratio of 3.0 times. NAV per unit was £0.39 as of 7 October 2024.

Following the UK’s Autumn Budget 2024, the Office of Budget Responsibility forecasts inflation to average 2.5% in 2024, increasing to 2.6% in 2025, along with a slower reduction in interest rates. The Manager is expected to continue providing stable income to unitholders, having hedged 87% of interest rate exposure and collecting close to 100% rent a quarter in advance. Elite UK REIT’s portfolio is supported by a stable government-backed income stream with AA-rated sovereign credit strength. The UK’s claimant count for September 2024 increased month-on-month and year-on-year to 1.8 million. The unemployment rate is forecast to average 4.3% in 2024, a small increase on 2023, remaining close to 4.0%.

Elite UK REIT’s market cap stands at GBP178.3mln, trading at 0.7x PB, with a dividend yield of 9.1%. Consensus target price stands at S\$0.33, representing a 10% upside from the current share price.

Macro Market News

US Market

BCA Research notes that a resilient US consumer poses a risk to a defensive investment thesis but aligns with recent trends where the US economy holds up against peers. A resilient consumer is key to a successful soft landing in the US. The upside breakout of small-cap stocks suggests markets are pricing in this scenario and reflecting former president Trump’s recent polling strength. Small caps remain attractive for bullish investors due to cheapness in a market priced for perfection and providing domestic US exposure amid global headwinds. However, small caps may underperform lower-beta plays over a 6-12 month horizon.

New construction fell 0.5% after a 7.8% rise a month prior, extending the recent US housing slowdown. Residential units under construction fell 1.9% month-on-month, continuing a decline since December 2023. While the NAHB Housing Market Index ticked up in October after troughing in August, risks remain skewed to the downside with the recent uptick in US mortgage rates. Weak housing is a reliable leading indicator of US recessions due to residential investment’s procyclical behavior and multiplier effect on other sectors. Continued housing weakness points to higher slack ahead, impacting global US consumer demand through import channels.

Continued housing weakness supports a defensive investment thesis, especially with risk assets priced to perfection. Given US housing’s global reach, an underweight on equities and credit is recommended, with an overweight on government bonds. Crude prices have been volatile but trendless in 2024, illustrating the demand and supply tug-of-war. The bias is for crude prices to weaken over six-to-nine months. Good economic news like US consumption resilience and China’s stimulus announcements have not sustained higher prices, with Brent rejecting resistance levels of \$80/bbl. Recent geopolitical tensions should have increased crude prices, but absence of price appreciation suggests ample spare capacity to offset potential Iranian supply loss.

China/Hong Kong Market

Chinese provinces, accounting for about a third of the economy, are experiencing a worse year than the nation overall, leading to government stimulus measures. Only five mainland provinces report real GDP growth faster than last year. Of 26 provinces reporting third-quarter data, 11 experienced a steeper deceleration than the national slowdown. Tibet, Jilin, and Hainan are the worst performers with a 3.2% gain, 6 percentage points lower than in 2023. Economic powerhouses like Zhejiang, Shanghai, and Jiangsu saw GDP growth slow. Guangdong, making up more than 10% of the economy, expanded just 3.4%, the weakest result since the pandemic, down 1.4 percentage points from 2023.

Nationwide GDP expanded 4.8% in the first nine months, versus 5.2% last year. The sharp downswing in key Chinese regions leaves wide swathes of the \$18 trillion economy expanding below the 5% target. Beijing deployed bold stimulus measures in late September. Problems are widespread with industrial output falling in Heilongjiang, Qinghai, and Shanxi, and retail sales dropping in Beijing and Shanghai. Restaurant and hotel sales fell 5.1% in Beijing and over 11% in Shanghai. Local governments face worsening finances, as debt piles up and incomes fall due to a land sales slump. The central government’s promised help has not yet alleviated deficits.

Company Transactions

Acquisitions

  • Stamford Ty Corp Ltd: Dawn Wee acquired 2,262,600 shares at \$0.22, increasing her stake to 40.41%.
  • Raffles Medical Group: Loo Choon Yong acquired 1,000,000 shares at \$0.885, increasing his stake to 55.412%.
  • Heeton Holdings Ltd: Toh Gap Seng acquired 100,000 shares at \$0.25, increasing his stake to 5.88%.
  • Broadway Industrial Group Ltd: Patec acquired 196,964,849 shares at \$0.197, increasing its stake to 43.32%.
  • Stamford Land: Ow Chio Kiat acquired 154,600 shares at \$0.375, increasing his stake to 46.021%.
  • Capland Ascott Trust: Somerset Capital Pte Ltd acquired 289,697,276 shares at \$0.905, increasing its stake to 28.48%.
  • Zixing Khoo Thomas Clive acquired 6,500,000 shares at \$0.028, increasing his stake to 10.35%.
  • Indofood Agri Resources Ltd: PT ISM acquired 405,100 shares at \$0.32, increasing its stake to 85.15%.

Disposals

  • Beng Kuang Marine: Ginko AGT Global Growth Fund disposed of 3,093,700 shares at \$0.25, reducing its stake to 5.58%.
  • Dyna-Mac Holdings Ltd: Estate of Lim Tze Jong disposed of 3,000,000 shares at \$0.65, reducing its stake to 30.89%.
  • Digital Core REIT: Cohen & Steers Capital Mgmt disposed of 136,500 shares at US\$0.62, reducing its stake to 7.997%.
  • AEM Holdings Ltd: EPF Board disposed of 801,100 shares at \$1.28, reducing its stake to 8.979%.

Share Buybacks

  • Capitaland Investment Ltd: 1,750,900 shares at \$2.96, cumulative purchases 18.7% of mandate.
  • Zheneng Jinjiang Environment: 150,000 shares at \$0.40, cumulative purchases 3.58% of mandate.
  • FNN: 116,000 shares at \$1.40, cumulative purchases 0.7931% of mandate.
  • Seatrium: 1,005,000 shares at \$1.99, cumulative purchases 4.95% of mandate.
  • Global Investment Limited: 300,000 shares at \$0.117, cumulative purchases 21.073% of mandate.
  • OCBC: 350,000 shares at \$15.32, cumulative purchases 2.34% of mandate.
  • Digital Core REIT: 220,000 shares at US\$0.5823, cumulative purchases 12.227% of mandate.
  • KSH Holdings: 216,000 shares at \$0.195, cumulative purchases 6.7% of mandate.
  • China Sunsine Chemical Holdings Ltd: 100,000 shares at \$0.47, cumulative purchases 4.2% of mandate.
  • Ouhua Energy: 550,000 shares at \$0.096, cumulative purchases 7.7% of mandate.
  • Intraco Ltd: 63,400 shares at \$0.355, cumulative purchases 26.25% of mandate.
  • Venture Corp: 18,000 shares at \$13.70, cumulative purchases 2.399% of mandate.
  • SATS Ltd: 1,088,400 shares at \$3.80, cumulative purchases 4.264% of mandate.
  • Ever Glory United Holdings Ltd: 110,000 shares at \$0.39, cumulative purchases 4.855% of mandate.
  • ST Engineering: 512,900 shares at \$4.51, cumulative purchases 2.0% of mandate.
  • UOB: 28,000 shares at \$32.50, cumulative purchases 1.739% of mandate.
  • SIA Engineering: 54,000 shares at \$2.44, cumulative purchases 2.6% of mandate.

Dividends and Special Distributions

Company Amount First Day Ex-Dividend Date Payable Date
Avi Tech Holdings Ltd 0.75 c Final 7 Nov 26 Nov
Micro Mechanics 3.0 c Final 7 Nov 18 Nov
SGX 9.0 c Interim 7 Nov 15 Nov
Grand Bank Yacht 1.0 c Final 7 Nov 18 Nov
PEC Ltd 2.0 c Final & 1.5c Special 8 Nov 25 Nov
MTQ 0.5 c Interim 8 Nov 20 Nov
Unionsteel Holdings Ltd 1.3 c Final 12 Nov 27 Nov
First REIT 0.58 c (July-Sept) 12 Nov 20 Dec
SIA Engineering 2 c Interim 12 Nov 29 Nov
AIMS APAC REIT 2.4c 13 Nov 24 Dec
Netlink NBN Trust 2.68 c Interim

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