SIA Engineering - CIMB Research 2015-10-06: Stable Changi provides some cushion

SIA Engineering - CIMB Research 2015-10-06: Stable Changi provides some cushion SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Stable Changi provides some cushion 

  • In Aug 15, Changi’s flights handled were up 6.6% yoy. In Apr-Aug 15, flights handled were up 2% yoy suggesting stable line maintenance for SIE. 
  • Heavy airframe checks could return in FY17 based on SIA fleet movement. 
  • Associates’ structural headwinds persist but could have reached trough. 
  • Net cash of c.S$450m should sustain 4% dividend yield in FY16. 
  • Upgrade from Reduce to Hold. 

Line maintenance supported by positive Changi data 

  • Despite the lacklustre general macroeconomic sentiment, Changi airport posted a 4.4% yoy increase in the number of flights handled to 29,610 (955/day) in Aug 15. Cumulative flights handled from Apr-Aug 15 also picked up by 2% yoy. 
  • We believe that this could help to cushion SIE’s line maintenance work (c.40% of SIE’s group revenue). Given its quick turnaround and lower equipment component, this segment fetches higher operating margins of c.20% versus airframe overhaul’s -2%. 

Heavy checks may gradually return in FY17 

  • Given that SIA dominates 60% of SIE’s revenue, we expect volume growth for heavy checks to return in FY17 based on SIA’s fleet analysis. Most of the major checks (C3 and D) were carried out in FY12/FY13, resulting in the current “interval” cycle while awaiting the next season. We believe that the next round of heavy checks for SIA’s main fleet – A380 and B777- will start in FY17. 

Good cost control could narrow airframe repair operating losses 

  • We expect sequential narrowing of airframe repair operating losses in 1H16 versus 2H15, on the back of good cost control and productivity. The division suffered its first operating loss of S$8.8m in 1H15 but this narrowed to -S$5.5m in 2H15. We believe that the trend will continue in 1H16 (segmental disclosure only in 1H and 2H) as EBITDA margin turned around in 1Q16 (12.9%) with stable staff, subcontractors and materials costs. 

Associates/JVs’ contribution likely to rise gradually 

  • Although shop visits may still be slow due to the extended life cycle of aircraft engines and phasing out of older engine models, we believe that the degree of reduction may have troughed. Contribution from JVs/associates turned around to rise 13% qoq in 1Q16 to S$24m after five quarters of sequential dip. The improvement in 1Q16 was due to the higher number of engines repaired by Eagle Services, as well as higher sale of tools and equipment that was offset by fewer engine repairs by SAESL. 

Upgrade from Reduce to Hold 

  • We tweaked our EPS for FY15-17 by -1% on lower airframe repair but keep our target price of S$3.80, still based on a DCF valuation. We believe that the 12-month share price underperformance has priced in the structural headwinds. 
  • In addition, we expect the company to keep its DPS of S$0.145 or c.88% payout, backed by net cash of S$450m at 1Q16. As such, we upgrade SIE from Reduce to Hold. Re-rating catalysts could come from stronger-than-expected earnings recovery.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2015-10-06
CIMB Securities SGX Stock Analyst Report HOLD Upgrade REDUCE 3.80 Same 3.80