CIMB Research 2015-07-28: SIA Engineering - Still off the wind. Maintain REDUCE.

Still off the wind 

  • At 22% of our FY3/16 forecast, SIE’s 1Q16 net profit of S$41m (-23% yoy, -0.5% qoq) is in line with our and consensus expectations. 
  • The yoy revenue and profit weakness were as expected due to lower heavy checks and engine visits at its associates/JVs. 
  • On a qoq comparison, SIE’s profit appeared to have bottomed out, driven by a stable topline and under-controlled staff costs. 
  • However, we would not rush to accumulate this stock as its valuation is still stretched at 20x CY16 P/E, 1 s.d. above its historical mean. 
  • We see sequential qoq improvement in volume growth as a potential re-rating catalyst. 
  • We maintain our Reduce rating and target price (S$3.80), still based on DCF valuations. 

Stable revenue SIE posted 

  • 1Q16 revenue of S$277m (-5.7% yoy, +0.5% qoq). 
  • We believe the stable revenue qoq could mean that the number of planes requiring heavy checks was still low but operations were offset by firm fleet management and line maintenance. 
  • Volume growth for heavy checks could only start to pick up in FY17 as SIE is in a low cycle as workshop visits for B777 and A380 planes (mainly for Singapore Airlines) were completed two to three years ago. 
  • Costs under control EBIT margin would have improved to 12.9% in 1Q16 (4Q15: 12.2%; 1Q15: 12.4%) if not for the S$4.6m forex loss. 
  • The better margin stems from stable staff costs at S$119m (-6% yoy, +2% qoq), which accounted for 46% of its total op expenses. 
  • Sub-contractors’ costs (16% of total expenses) also declined by 4% qoq and 8% yoy to S$39.8m in line with the lower work load. 

Associates up, JV down 

  • Profit from associates rose qoq 79% to S$14.5m while those from JVs decreased by 28% qoq and 42% yoy to S$9.5m. 
  • Eagle Service, which services Pratt & Whitney engines, continued to be under pressure as old engines are phasing out. 
  • Pending better clarity from SIE on its in associates’ qoq growth, we view the overall outlook for engine repair as still weak. 
  • SIE guided for a challenging overall market for MRO. 
  • Rising business costs and competition from increasing MRO capacity in the region will continue to exert pressure on margins. 

Valuation is still steep at +1 s.d. of mean 

  • We would only buy SIE on sequential qoq earnings improvement or volume growth.

(LIM Siew Khee)