SIA Engineering Company Ltd - Phillip Securities 2015-11-04: Engine problems, but Line Maintenance improves

SIA Engineering Company Ltd - Phillip Securities 2015-11-04: Engine problems, but Line Maintenance improves SIA ENGINEERING CO LTD S59.SI 

SIA Engineering Company Ltd - Engine problems, but Line Maintenance improves 

  • Top-line negatively impacted by less component overhaul work content, but partially offset by improvement of Line Maintenance revenue. 
  • Weak contributions from Associates and JVs continue to hurt bottom line. 
  • 6.0 Cents interim dividend declared, likely to be lower for full year. 

What is the news? 

  • SIA Engineering Company Ltd (SIAEC) announced its 2Q FY16 (Y/E Mar) results on 2 November after trading hours. 

 Line Maintenance segment to stabilise Group revenue, accounted of 41.8% in 1HFY16. 

  • Management briefed that there is a trend towards less overhaul work scope being carried out in the hangar, but on the apron-side instead (Airframe & Component segment has been negatively impacted). Hence, we believe there will be a shift in revenue mix, with a higher contribution from the Line Maintenance segment. 
  • In the near term, there was a 4.7% y-o-y growth in flight movements at Changi Airport in 3QCY15, with a corresponding 1.9% y-o-y growth in flights handled by SIAEC. 
  • In the longer term, Changi Airport's aircraft handling will further expand capacity when Terminal 4 completed in 2017. 
  • There is also the possibility of airlines capitalising on the prolonged lower oil price to expand their fleet. 

 JV with Boeing will act as a gateway for Overhaul and Maintenance work. 

  • Boeing Asia Pacific Aviation Services Pte Ltd (BAPAS), which was incorporated on 5 October 2015. SIAEC holds a 49% stake in the JV. The JV will support customers' Boeing fleet with customised and integrated fleet management services. This would in turn channel work to SIAEC's other associates & JVs. 

 Engine maintenance cycle extended as engine reliability improves, but maintenance cycle likely to start coming in during FY17e. 

  • After eight consecutive quarters of lower contribution to the associates & JVs line, we view the possibility of this bottoming out sometime in FY17e. We are forecasting for the engine jobs to start coming in during FY17e and continue to ramp up to a steady state into FY18e, which is lower than historical. 

 Lowered CapEx estimates. 

  • We have lowered our FY16 and FY17 CapEx assumptions by c.20%, as recent CapEx was primarily due to the third hangar at Clarke in the Philippines, and we do not see much expansion opportunities in the near term. Our CapEx assumption is now in line with annual depreciation expense. 

Investment Actions 

  • "Reduce" rating on SIAEC maintained, with slightly higher target price of S$3.46. (Previous: S$3.43) 
  • We also see the possibility of lower FY16e dividend of 14.0 Cents, vs. 14.5 Cents in FY15, making 3.5% forward dividend-yield unattractive. 

Potential positive catalyst 

  • We currently believe that when engine jobs do come back, contribution from JVs will still be lower than historical, due to the extended maintenance cycle. The potential positive catalyst is that fleet size expansion increases sufficiently to offset the less frequent engine shop visits.

Richard Leow CFTe Phillip Securities | 2015-11-04
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 3.46 Up 3.43