SIA ENGINEERING CO LTD
S59.SI
SIA Engineering - Earnings Have Not Recovered
- SIE's 1QFY3/18 net profit of S$36m (-13% yoy, -21% qoq) is broadly in line with our expectations and consensus, forming 22% of our FY18F.
- Overall revenue steady at S$273m, likely helped by line maintenance. Lower materials costs could mean airframe MRO remains weak.
- Earnings could have been better if associates profit did not lose steam qoq..
- Maintain Reduce and target price of S$3.86, still based on DCF (WACC: 6.4%). Rerating catalysts could come from earnings pick-up and corporate action from SIA.
Unexciting generally
- We consider the 1Q results in line as subsequent quarters could see some lumpiness in jobs, lifting revenue.
- The key positive was steady revenue, which we think is in line with Changi’s flights handled. Costs have been relatively well contained with staff costs up 1% yoy to S$254m (50% of operating costs).
- Material costs were down by 16% qoq and 7% yoy to S$43m (17% of operating costs), which is likely due to weak airframe MRO. The EBIT margin was steady yoy at 11.7%.
Could be better if associates profits kept their momentum
- Associates profit contribution dropped 24% qoq (but up 26% yoy) to S$17m, while JV contribution was on a downward trend of -14% qoq and -42% yoy to S$4m. Associates had delivered two consecutive quarters of qoq growth (average 33%) starting from 2Q17 as a result of more engine visits from Pratt & Whitney with the delays in retirement of old aircraft, but we believe this income source could have peaked in 4Q17.
- We see downside risks to our earnings if associates profits taper off in the subsequent quarters.
SIA may find it hard to part with the cash
- Net cash stood at S$602m, boosted by dividends from associates and JV during the quarter. With this, we think SIE is likely to remain a cash cow for SIA, especially when the airline is gradually turning into a net debt position. This makes the divestment of SIE harder to justify.
Maintain Reduce and target price
- SIE’s share price has weakened by 11% in the recent month, but we believe it is still not time yet to be excited about the stock, given that its valuation at 26x FY19F P/E is above its 5-year mean of 24x.
- Earnings downside could stem from longer intervals between heavy checks and weaker contribution from associates.
- Upside risk could come from earnings accretive M&A or corporate action at SIA’s level.
- Maintain Reduce.
LIM Siew Khee
CIMB Research
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http://research.itradecimb.com/
2017-07-25
CIMB Research
SGX Stock
Analyst Report
3.860
Same
3.860
