SIA Engineering - OCBC Investment 2016-11-02: Adapting To New Maintenance Trend

SIA Engineering - OCBC Investment 2016-11-02: ADAPTING TO NEW MAINTENANCE TREND SIA ENGINEERING CO LTD S59.SI

SIA Engineering - ADAPTING TO NEW MAINTENANCE TREND

  • Core 1HFY17 missed expectations.
  • Dividend cut on weak earnings.
  • Maintain HOLD on lower FV.


Special dividend did not materialize in 2QFY17 

  • SIA Engineering Company Ltd’s (SIAEC) 2QFY17 core PATMI declined 11.2% YoY to S$35.7m, on the back of a 0.5% decrease in revenue to S$264.8m and a 0.5% increase in operating expenses to S$240.3m, driven mainly by higher material and staff costs. 
  • 2QFY17 share of profits of associated and JV companies declined 8.0% YoY to S$17.2m, due to lower work content on engines. 
  • For 1HFY17, revenue declined 1.3% YoY to S$536.4m on weaker contributions from aircraft & component overhaul services (ACS) and fleet management (FM) segments, but partially offset by line maintenance (LM) segment. 
  • Excluding one-time items, SIAEC’s 1HFY17 core PATMI missed our expectations as it fell 6.9% YoY to S$74.3m, which formed only 45.5% of our FY17 forecast. 
  • The special dividend that we had expected to be paid out of the divestment gain recorded in 1QFY17 did not materialize in 2QFY17.


JVs with OEMs key to long-term sustainability 

  • Going forward, SIAEC has noted longer heavy check intervals (from 4-6 years to 7-10 years) of new aircraft and lower work content on newer/improved engines as the new norm. Hence, ACS segment will likely remain weak but offset by growth from its LM business as the traditional heavier checks on new-generation aircraft are now broken down into multiple phases. And each “phase check” will be performed on the apron to reduce aircraft ground time. 
  • Management has also stated investment in technology will increase as they adapt to this new trend, as well as working with Airbus to value-add to their customers by reducing aircraft turn time in the hangars. 
  • With aircraft fleet expected to continue its growth ahead, we believe SIAEC will be a beneficiary in the long-run through its collaboration with aircraft OEMs: 
    1. JV with Boeing (FM), and 
    2. JV with Airbus (ACS).


Weak revenue outlook to persist 

  • On weak near-term outlook, we cut our FY17/FY18 core PATMI forecasts by 10.9%/8.3%. That said, we still expect SIAEC to declare 25% of the S$156.7m divestment gain recorded in 1QFY17 as special dividends for FY17. 
  • Consequently, our DDM-derived FV estimate decreases from S$3.63 to S$3.58. 
  • Maintain HOLD.




Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-11-02
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 3.58 Down 3.630




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