SIA Engineering (SIE SP) - Maybank Kim Eng 2017-11-07: Recovery Momentum Sluggish

SIA Engineering (SIE SP) - Maybank Kim Eng 2017-11-07: Recovery Momentum Sluggish SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - Recovery Momentum Sluggish


Maintain HOLD: 2Q18 miss vs. our expectations 

  • 2Q18 core profit of SGD38m, up 7.3% YoY, was below our expectation as the anticipated double-digit rebound in Repair & Overhaul (R&O) remained elusive. Despite the outlook for a traditionally stronger second half, 1H18 profits fell short at just 37% of our prior full year forecast.
  • Hence, we cut FY18/FY19 profit estimates by 21-23% factoring a slower rebound and higher costs at new ventures, and cut TP by 5.4% to SGD3.50 based on 5 year forward PER mean of 21x FY3/19E EPS (20x previously).


Repair & Overhaul still weak 

  • Weak 1H18 R&O revenue was a key area of disappointment – for parent company, airframe and components revenue fell 0.6% YoY while fleet management fell c15% with the loss of a major customer. 
  • At associate/JV level, engine repair and overhaul grew a marginal 0.4%. Industry overcapacity, restructuring of its associate with Rolls Royce and longer maintenance cycles for new aircraft are amongst the various reasons contributing to this sluggish performance.


Line Maintenance delivered 

  • At parent company, 1H18 Line Maintenance (LM) revenues grew a solid 9.4% YoY while associate/JV contribution rose 12.5%. Flights handled at Changi grew 3.8% with market share relatively unchanged at c80%. 
  • SIE has a presence in 37 airports now with Osaka, Japan being the latest addition during the half, and is well positioned to benefit from structural long term trends of rising air travel, growing airline fleets in APAC.


New partnerships positive but near term tough 

  • We are positive on the long term growth potential of a number of the new partnerships/JVs announced this year, more specifically ones with Air India for line maintenance services, with MOOG for maintenance of flight control systems in new generation aircraft and with General Electric for engine overhaul. 
  • That said, material contributions from these ventures will likely take 6-8 quarters and in the near term the business continues to face high competitive pressures from peers and OEMs and structural changes in MRO cycles with new generation aircraft.


2Q FY18 results takeaways 

  • Revenues up 2.1% YoY for 1H18 with R&O and LM an almost even split. R&O dropped 4.1% while LM grew 9.4%. 
  • Within R&O, fleet management saw a large 14.1% drop with the loss of Cebu Pacific as a customer which resulted in the active fleet managed shrinking from 129 aircraft in 2H17 to 84 currently. For heavy maintenance at parent company, both ‘A’ and ‘C’ checks in 1H18 were relatively flat at 219 and 45, respectively (vs. 215 and 50 in 1H17). ‘C’ checks almost doubled at its Philippine associate to 30 aircraft (vs 16 in 1H17).
  • Two new customers were acquired for LM during the half – Hebei Airlines and Lanmei Airlines. 1H18 operating expenses rose 6.3% YoY mainly due to staff costs at the subsidiaries overseas with expansion in the LM business.
  • Associate/JV contribution increased 16.1% YoY on a strong performance from Eagle Services (venture with Pratt & Whitney) with higher work content of engines shipped. Singapore Aero Engine (venture with Rolls Royce) saw lower contributions post restructuring of holdings and improved reliability of Trent engines requiring lower work.
  • Capex expected to remain at current levels for this year and next i.e. cSGD40-45m annually.
  • Interim dividend unchanged YoY at SGD0.04/share.


Forecast and valuation changes 

  • We have cut our FY18/FY19 revenue by 6-7% to factor in a much slower than earlier expected recovery in R&O. We were initially expecting a double-digit growth recovery in FY18 but now anticipate a much slower rebound drawn out to FY20 given that competitive pressures remain unabated and aircraft OEMs are also increasing their involvement directly in the business. Our LM revenue growth expectation of 5-8% for the next three years remains unchanged.
  • We have raised operating costs for FY18/FY19 to factor in management guidance for a greater degree of upfront costs to be expected in line with overseas expansion in the LM segment. Management anticipates expanding the network by around two new airports per year.
  • As a result of revenue and operating cost forecast changes, our core profit forecast for FY18/FY19 has been cut by 21-23%.
  • Our revised target price based on a 12-month forward PER has been correspondingly cut by 5.4% to SGD3.50. We use a five year mean PER of 21x (20x previously) on FY3/2019F EPS to derive our target.



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.




Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-07
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.50 Down 3.700



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