OCBC Investment Research 2015-07-28: SIA Engineering - 1QFY16 results below expectations. Maintain SELL.

SIA Engineering: 1QFY16 results below expectations 

 Not surprising to see a weak 1QFY16 
 Headwinds likely to persist
 FV unchanged; maintain SELL 

Yet another quarter of YoY decline in core PATMI 

  • SIA Engineering Company Limited (SIAEC) reported yet another set of below expectations results for 1QFY16. 
  • SIAEC recorded a 5.7% YoY drop in 1QFY16 revenue to S$277.3m due to lower airframe component and overhaul revenue (ACS). 
  • However, management’s strategy in focusing on tight cost management and productivity improvement continues to bear fruit, as 1QFY16 operating expenses declined 6.2% YoY to S$256.4m. 
  • As the decline in expenses more than offset the weaker revenue and higher exchange loss, SIAEC’s 1QFY16 operating profit rose 1.0% YoY to S$20.9m. 
  • As expected, share of profits from its associated and JV companies remain weak in 1QFY16 with a 21.6% YoY drop to S$24.0m as contributions from the engine repair and overhaul centres were 41.4% lower than the same period last year. 
  • Consequently, SIAEC’s core PATMI, which formed 21.4% of our FY16 forecast, decreased 13.6% YoY to S$41.3m. 

Headwinds unlikely to subside in the near term 

  • With an unsurprising lacklustre performance from its 1QFY16 results, we expect headwinds causing the weakness to persist at least in the near to medium-term. 
  • In our view, SIAEC is facing a structural issue where airlines are deferring maintenance checks with improved aircraft/engines designs and performances. 
  • The increase intervals between workshop visits are likely permanent changes, and until SIAEC is able to secure more ACS jobs to fill the gaps, weak revenue contributions are likely to sustain. 
  • The extent to which tight cost management can help mitigate weak performances ahead is still limited in this labour intensive industry. 
  • However, we do note that SIAEC is likely to continue to pursue top-line growth in contributions from its Line Maintenance (LM) and Fleet Management Programme (FMP) segments to help mitigate overall weakness from ACS. 

Maintain SELL on persistent weakness 

  • Incorporating 1QFY16 results and on expectation of persistent headwinds, we opt to keep our forecasts unchanged after seeing progress on cost management. 
  • Hence, we maintain our SELL rating on SIAEC, with the same FV of S$3.45 (20x FY16F PER). 

(Eugene Chua)

Source: http://www.ocbcresearch.com/