SIA Engineering - OCBC Securities 2015-09-17: Weak outlook largely priced-in.


SIA Engineering: Weak outlook largely priced-in 

 6% drop in share price since late-July. 
 Weak outlook remains unchanged. 
 Upgrade to HOLD on valuation grounds. 

Negatives mostly priced-in 

  • Since our downgrade in Nov 14, the share price of SIA Engineering Company Limited (SIAEC) has fallen ~16%. SIAEC’s recent weakness is mainly due to the combination of poorer performances from its core business as well as lower contributions from associated companies and joint ventures (JVs). 
  • With a set of lacklustre operating statistics of Changi Airport between Jan 15 and Jul 15, we expect weaker revenue from its line maintenance (LM) segment in the near-term. That said, we believe the share price correction has largely priced-in the muted outlook. 

Persistent structural headwinds 

  • The headwinds SIAEC is facing are structural in nature. While the number of aircraft globally is increasing, its heavy maintenance business segment has been negatively impacted by longer maintenance cycles as newer aircraft and engines are designed with increasing reliability and better cost efficiency. 
  • At the same time, one of its JVs in the business of aircraft engines’ maintenance is phasing out older engine models without any immediate replacement, resulting in lower revenue going forward. 
  • In the near-term, we expect SIAEC’s fleet management programme (FMP) and overseas LM segments to help mitigate the revenue weakness. 
  • Over the longer-term, we believe there are three key growth drivers: 
    1. LM segment to grow as capacity is set to double at Changi Airport through the addition of Terminal 4 and 5, 
    2. with SIA likely to take delivery of its first of 63 ordered A350s in 2016, the increased fleet should help smoothen earnings despite the longer maintenance cycles, and 
    3. JV with Boeing to perform maintenance, repair and overhaul works for Boeing’s customers based in this region should help drive earnings ahead. 

Upgrade to HOLD 

  • At this current price level and supported by a decent FY16F dividend yield of 4.2%, we upgrade SIAEC to HOLD with an unchanged FV of S$3.45 (20x FY16F PER). 
  • Note that we still maintain our view that its near-to-medium-term operational performances are likely to remain weak on the above-mentioned headwinds. 

Eugene Chua | OCBC Securities 2015-09-17
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