SIA Engineering (SIE SP) - UOB Kay Hian 2017-02-06: 3QFY17 Earnings Boosted By FX Gains And Associate Income

SIA Engineering (SIE SP) - UOB Kay Hian 2017-02-06: 3QFY17 Earnings Boosted By FX Gains And Associate Income SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - 3QFY17 Earnings Boosted By FX Gains And Associate Income

  • 3QFY17 earnings were slightly better than expected as SIAEC recognised S$4.8m in FX gains vs losses previously. Excluding that, core net profit would have declined 21% yoy. 
  • Meanwhile, associate and JV income fared better than expected, given the high base in 3QFY16. We reckon that this could have been due to higher contribution from the fleet management JV with Boeing. However, this is unlikely to stem the expected earnings decline over the next two years and we remain sellers of the stock. 
  • Maintain SELL and target price of S$3.30.



RESULTS


3QFY17 results slightly better than expected mainly due to exchange gains. 

  • SIA Engineering’s (SIAEC) headline net profit included a S$2.3m gain on the disposal of associate vs disposal losses recorded in 3QFY16 previously. 
  • Core net profit would thus have declined by 9% yoy in 3QFY17. SIAEC also benefitted from S$4.8m in FX gains (vs 3QFY16: S$2.1m FX losses), presumably due to a weaker Singapore dollar. Excluding both, core net profit would have declined 21% yoy. 
  • JV and associate income was slightly better than expected, given a high base in the previous year.

Pace of revenue decline accelerated in 3QFY17. 

  • Top-line declined 1.1% yoy, accelerating from 2Q’s 0.5% decline. SIAEC attributed this to less fleet management and lower airframe and component overhaul revenue, partly offset by higher line maintenance revenue.

Losses at the airframe maintenance segment likely to have dragged down operating profit. 

  • Staff costs also rose 7.5% yoy, but would have risen by only 1.8% yoy if sub-contract costs were taken into account.
  • Associates and JV income surprised on the upside, given that the previous year had a high base due to one-off restructuring gains. Excluding that, there is a possibility that overall associate and JV income could have improved but we are unable to ascertain that as SIAEC did not disclose the exact quantum of restructuring gains in 3QFY16.
  • Meanwhile, associate income rose 11% yoy. This could have been due to increased contribution from the JV with Boeing (BAPAS), which provides fleet management services for B737, 747, 777 and 787s.


STOCK IMPACT


While there is a possibility that the new Boeing JV could have contributed in 3QFY17, this would not be cause for a re-rating. 

  • Airframe maintenance was likely in the red in 3QFY17 and is unlikely to improve over the next few years, given hangar overcapacity in the region. 
  • FL Technics has also commenced operations at its new hangar at Jakarta Soekarno-Hatta Airport in Dec 16 and plans to further expand its hangar. This would offer a low-cost alternative in close proximity to SIAEC’s hangars in Singapore. In addition, engine maintenance profits are expected to continue to decline in the near term as the older PW4000 engines are phased out and new-generation Trent engines will only reach their maintenance cycles in 3-5 years. 
  • Meanwhile, line maintenance revenue is highly dependent on flight movements at Changi, and a potential improvement in contribution from the BAPAS associate is unlikely to stem the earnings decline over the next two years.

Rich valuations. 

  • SIAEC is trading at 26x 2017F PE, 1SD above long-term mean PE and 37% above MRO peers. This is despite the company’s continuous guidance on the challenging environment. 
  • We believe that the steep premium to peers is unwarranted given the weak earnings prospects. 
  • In comparison, STE (STE SP) trades at 20x 2017F PE and offers a higher 2017 dividend yield of 4.5%.


EARNINGS REVISION/RISK

  • We raise our FY17 net profit estimate by 3.7%, factoring in a possible improvement in associate income and a stronger US dollar.


VALUATION/RECOMMENDATION


Maintain SELL with an unchanged target price of S$3.30. 

  • We continue to value SIAEC using DCF with an unchanged WACC and long-term growth rate of 5.5% and 1.4% respectively. 
  • Our target price of S$3.30 implies a FY18F PE of 24x and dividend yield of 3.3%.


SHARE PRICE CATALYST

  • No immediate catalyst.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-06
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.300 Same 3.300





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