SIA Engineering - DBS Research 2024-11-11: Core Business Recovery Narrative Challenged

• SIA Engineering reported 2QFY25 net profit of S$35.6mil (+7.2% q-o-q, +10.1% y-o-y), bringing 1HFY25 net profit to S$68.8mil, 44% and 41% of consensus and DBS’s full-year estimates, respectively, missing projections.

2QFY25 results came in below expectations from cost headwinds and supply chain disruptions.

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• Despite a 9% y-o-y increase in revenue, the B&LM segment suffered margin erosion (-150bps y-o-y in 1HFY25) to 2.4%, likely due to higher labour costs and supply chain bottlenecks that led to idle time and extended check durations, resulting in cost inefficiencies and delayed revenue recognition.

Margin compression in 1HFY25 particularly concerning

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• Management mentioned that while the labour situation is no longer as tight as in the previous year, broad-based part shortages continue to make planning and coordination difficult, often leading to delays as they wait for parts to arrive.
• Although SIA Engineering is proactively taking steps to overcome these bottlenecks, including digital initiatives to better anticipate component shortages and enhance enterprise planning, it appears that the aviation supply chain could remain stretched for the next one to two years.

Start-up & development costs to also impede margin improvement and potentially impact contributions from associates/JVs.

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Jason SUM CFA DBS Group Research | https://www.dbs.com/insightsdirect/ 2024-11-11 SGinvestors.io

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