1QFY16: Weak Start As Engine JVs Falter; Net Profit Comes In Below Consensus Estimate
- 1QFY16’s net profit fell 23% yoy on the back of a steep 41% decline in engine maintenance contributions.
- We had previously warned that this segment was likely to decline as the Pratt & Whitney’s PW4000 engine variant was being phased out and that newer engines will only reach their maintenance cycles in 2-3 years.
- 1QFY16 earnings bear testament to our view.
- Maintain SELL.
- Target price: S$3.00.
RESULTS
• Weak start and below consensus as engine JVs falter.
- SIA Engineering’s (SIAEC) earnings are below consensus estimates which have forecasted a mere 1% decline for the full year vs our estimate of a 21% decline.
- Adjusting for a S$5.8m gain in the previous quarter, net profit would have declined by a lower 13.4% yoy.
- Much of the weakness in earnings however came in at the JV level, which was impacted by a 41% decline in engine maintenance contributions.
• Revenue declined for four straight quarters and exceeded consensus and our estimates.
- The decline at the top-line level was attributed to lower airframe component and overhaul revenue.
- We expect consensus to pare revenue estimates down as the market is assuming a 2.6% increase, while we have projected a 1.2% decline for FY16.
• Good cost control led to slight improvement in operating margins.
- While top-line declined by 5.7% yoy, opex fell by a greater 6.2%, leading to a 0.5ppt improvement in operating margins to 7.5%.
STOCK IMPACT
• Consensus is still too bullish.
- SIAEC has guided for challenging conditions.
- SIAEC indicated that "rising business costs and competition from increasing MRO capacity in the region will continue to exert pressure on margins".
- This affirms our view of increasing regional competition, from lower cost centres.
- SIAEC will also be impacted by ongoing parent capacity cuts.
EARNINGS REVISION/RISK
• Earnings in line.
- No change to our earnings forecasts.
VALUATION/RECOMMENDATION
• Reiterate SELL.
- SIAEC’s weak start to the year is indicative of the challenging operating conditions.
- Management’s efforts to control operating costs have resulted in stable margins. However, there is no denying that SIAEC faces structural challenges in growing its business.
- Weaker-than-expected earnings and management’s guidance of difficult market conditions suggest that there is downside risk to consensus earnings estimate.
- PE valuations remain lofty at 30x and we believe both earnings estimate and PE multiples are likely to contract in coming quarters.
- We reiterate SELL with a target price of S$3.00, which implies a 1-year forward PE of 23x vs the historical mean of 16x.
- Our forecasts are 19.4% below consensus.
- Key risks to our SELL call is higher travel demand and lower staff costs.
SHARE PRICE CATALYST
- No immediate catalyst
(K Ajith)
Source: http://research.uobkayhian.com/
