UOB Kay Hian Research 2015-07-28: SIA Engineering - 1QFY16: Weak Start As Engine JVs Falter; Net Profit Comes In Below Consensus Estimate. Maintain SELL.

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/



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