Phillip Securities Research 2015-07-28: SIA Engineering - Improved technology a bane for MRO. Maintain REDUCE.

Improved technology a bane for MRO


  • Technological advancement in aircraft and engines have impacted results at the top line and associates & JVs lines. 
  • EBIT was flat despite the lower revenue, mainly from lower subcontract costs. 
  • Maintain at "Reduce" rating with unchanged target price of S$3.43. 



What is the news? 


  • SIA Engineering Company Ltd ("SIAEC") announced its 1Q FY16 (Y/E Mar) results on 27 July after trading hours. 


Analyst briefing key takeaways 


  • No Analyst Briefing, as SIAEC only holds them during 2Q and 4Q results. 


How do we view this 


  • Lower revenue did not come as a surprise; which was undermined by technological advancement in aircraft. S$277.3 million revenue makes up 24.9% of our full year FY16 estimate of S$1.11 billion. Technological advancement in aircraft (more reliable and requiring less maintenance) had resulted in fewer tasks and longer intervals between checks. 
  • Improved reliability of engines continued to weigh on the Associates & JVs line, and is a long-term headwind. Contributions from the engine repair and overhaul centres (Eagle Services & SAESL) at S$11.2 million were S$7.9 million or 41.4% lower y-o-y. 
  • Associated companies show sign of stabilisation. Share of profits of associated companies was marginally higher by S$0.2 million, despite a lower contribution from Eagle Services. This suggests that some of the associated companies fared better y-o-y. 


Investment Actions 


  • As aircraft and engine reliability improves, cost-conscious customers will continue to extend maintenance cycles. 
  • This will continue to be a headwind for the MRO sector. 
  • Maintain "Reduce" rating on SIAEC, with unchanged target price of $3.43. 


(Richard Leow, CFTe)

Source: http://www.poems.com.sg/



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