DBS Group Research 2015-07-28: SIA Engineering - No rebound in earnings yet. Maintain FULLY VALUED.

No rebound in earnings yet 


  • 1Q-FY16 earnings fail to bring much cheer, net profit down 23% y-o-y to S$41m. 
  • Weakness at engine MRO centers continue. 
  • Cut earnings estimates for FY16/17 by 5% 
  • Maintain FULLY VALUED call with TP of S$3.70. 


Highlights 


 Results not taking off for now. 

  • SIA Engineering failed to show any sequential improvement in fortunes as net profit of $41.3m was down 23% y-o-y (flat q-o-q). 
  • Revenue was down 6% y-o-y, owing to lower heavy maintenance revenue. 
  • 1Q-FY16 operating margin of 7.5% was lower than the 8-9% range reported in the last two quarters, thus maintaining a negative trend. 
  • Given this set of results, it is likely that sub-optimal capacity utilisations of hangars continues as maintenance cycles of new aircraft lengthen and the MRO market becomes more OEM-centric. 

 Engine shops continue to stutter. 

  • Share of profits from associates and JVs was up q-o-q but still down 22% y-o- y. 
  • The engine centres saw profit contribution slip from about S$19m in 1Q-FY15 to about S$11m in 1Q-FY16, or a decline of 41% y-o-y. 
  • SIE’s engine centres continue to be dragged down by the structural trend of older engine models being retired on an accelerated basis and newer models requiring less engine shop visits, thus lowering utilisation rates. 


Outlook 


Headwinds still prevail in near term. 

  • The heavy maintenance segment saw revenues decline by 15% in FY15. 
  • Newer aircraft are seeing their maintenance cycles being lengthened, on top of needing less maintenance by virtue of just being new, which does not bode well for SIA Engineering in the near term. 
  • The phasing out of older generation engine models continues to be a dampener on contributions from the company’s engine MRO centres Eagle Services Asia and SAESL. 
  • Low engine shop volumes are also expected to persist in the near to medium term as a result of extended maintenance cycles for new engine types. 

 Trimming earnings forecasts for FY16/17.

  • Given the lack of any recovery signals in both the heavy maintenance business and engine shops, we are more conservative on our forecasts and trim our FY16/17 earnings estimates by about 5% each. 

 Preparing for the future. 

  • The slump in fuel prices since September 2014 means airlines across the world are starting to benefit in terms of their bottomlines, and this should encourage more MRO spending in the medium term if oil prices stay benign. 
  • The fleet management JV with Boeing is SIA Engineering’s first JV with an airframe OEM and is a sign of the times, as OEMs enter the aftermarket services space, especially for high-value widebody aircraft. 
  • While there is risk of partial cannibalisation of fleet management services in Singapore, SIE will benefit from penetration of other markets in Asia. 
  • Management has indicated earlier that the aircraft MRO cycle should start to turn again over the next 2-3 years, as maintenance cycles cannot be deferred forever, even for new aircraft types. 


Valuation: 


  • In view of the weak earnings trend expected over the next few quarters, and lack of catalysts, we maintain our FULLY VALUED call. 
  • The current valuations look rich in terms of PE, but the ~4% dividend yield still lends some support though in an otherwise shaky broader market environment. 
  • Our valuation of S$3.70 for SIE is based on a blended valuation framework (a blend of PE, dividend yield and discounted cash flow [DCF] methodologies) to factor in both the earnings growth and cash-generative nature of the business. 


Key Risks: 


Slow growth at certain associates and joint ventures (JVs) 

  • Some of the engine repair JVs cater to older widebody models, which are being phased out. This will affect demand. 
  • New JVs and associates may cannibalise some of the group's existing revenue lines, which could slow growth. 


(Suvro SARKAR)

Source: http://www.dbsvickers.com/



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