SIA Engineering (SIE SP) - Maybank Kim Eng 2017-02-06: Better quarter but not good enough

SIA Engineering (SIE SP) - Maybank Kim Eng 2017-02-06: Better quarter but not good enough SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - Better quarter but not good enough


Maintain HOLD; Small miss vs. our expectation 

  • 3Q17 core profit of SGD50.3m was around 6% lower than our estimate and, we believe, below consensus expectation as well. It was a decent quarter nonetheless with core profit performance the second best since mid-2014. 
  • Softer revenue was the key area of underperformance with lower fleet management offsetting the growth in line maintenance revenue. 
  • 9M17 core profit accounted for 72% of our FY17 forecast (and c66% of consensus estimate). 
  • Maintain HOLD with unchanged TP of SGD3.70, based on 20x FY3/18E EPS (0.25SD above 10-year mean).


A year peppered with one-offs 

  • 3Q17 headline net profit of SGD52.6m included SGD2.3m gain on partial disposal of an associate while YTD gain of SGD159m included SGD178m from restructuring of its Rolls-Royce JV and an increase in related staff cost of SGD23.1m. 
  • Excluding various one-offs 3Q17 core profit declined 10.5% y-o-y but grew a significant 40% odd sequentially from 2Q17 which was affected by various divestments. 
  • 9M17 core profits were down 8.4%.


New strategic partnerships in the works 

  • Recent developments include an agreement with Moog Inc to establish a JV to overhaul products like components for flight control systems in new generation aircraft and a JV with Airbus for heavy maintenance services that SIAEC expects will help tap a larger target client market.
  • Management are optimistic about prospects for these ventures but do not expect them to be profit accretive in the near term.


Structural positives but near term outlook tough 

  • SIAEC is a beneficiary of long term trend of rising air travel in the region.
  • Its strategy of pursuing partnerships with key OEM component and aircraft manufacturers positions it competitively in the marketplace. But the near term growth outlook is challenging with global economic uncertainties affecting demand and the recent fleet upgrades undertaken by a number of its customers affecting MRO workload.


Swing Factors


Upside

  • Bigger-than-expected workload for Rolls-Royce Trent engines.
  • Acceleration in aircraft deployment.
  • Increased use of older aircraft on improving economics from lower oil prices.

Downside

  • Rising labour costs.
  • Fleet renewal by airline customers that could reduce maintenance work.
  • Poorly-executed acquisitions.




Derrick Heng CFA Maybank Kim Eng | Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-02-06
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.700 Same 3.700



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