Maybank Kim Eng 2015-08-14: SIA Engineering - Headwinds Priced in; U/G to HOLD.

SIA ENGINEERING CO LTD S59.SI

Headwinds Priced in; U/G to HOLD 

  • MRO work could pick up as global airlines return capacity & slow fleet retirement. Small beneficiary of USD strength. 
  • However, engine headwinds persist on improved Trentengine reliability. 
  • 24% correction in past year likely priced in its near-term headwinds. Upgrade to HOLD from SELL with unchanged SGD3.30 TP, at 20x FY3/16 EPS. Still prefer STE (BUY, TP SGD3.85) in sector. 

MRO could pick up, but engine headwinds persist 

  • Global airlines are likely to accelerate their capacity deployment in response to lower oil prices and slow down their fleet retirement. This should eventually lift the maintenance workload for SIAEC. 
  • That said, we stay cautious on its engine business. 
  • Recall that improved Trent-engine reliability has been affecting SAESL’s performance. This is its JV with Rolls Royce, accounting for over 30% of SIAEC’s net profit. 
  • We do not see a meaningful rebound anytime soon. 
  • SIAEC should also benefit from a strengthening USD (+13% YoY vs SGD) from its contracts signed in that currency and costs incurred in local currencies. However, we see peer STE as a bigger beneficiary, from translational gains from its US operations. 

Negatives priced in 

  • After its 24% correction in the past year, we believe its near-term headwinds have been priced in. 
  • Upgrade to HOLD from SELL with an unchanged SGD3.30 TP, based on 20x FY3/16 EPS. This represents 0.5 SD above its 10-year mean. 
  • We prefer STE as its EPS rebound next year is expected to be stronger, forecasted at +17.9% for 2016. 
  • With an order backlog of SGD12.4b or almost 2x sales, STE’s earnings visibility is also better.

Derrick Heng CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-08-14
HOLD Upgrade SELL 3.30 Same 3.30


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