SIA Engineering - CIMB Research 2015-12-09: Flying off course

SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Flying off course

Structural headwinds could last for the next two years before heavy checks return for aircraft and engines as the aviation is seeing more durable equipment.
Airlines are also milking the low oil price in the near term to increase flying hours and profitability, deferring heavy checks but split minor checks into smaller parcels.
We maintain our Hold call and target price of S$4.02 DCF valuation (WACC: 6.7%).

The evolution of designs on new aircraft has led to longer intervals in between scheduled checks, as much as 10-20%.
Heavy-equipment content checks such as the conventional 2-year “C” checks and 5-year “D” checks have largely been pushed back to three years and six years.
Short-term A-checks work are also split into smaller parcels done at the apron to enhance airline’s flying hours.

With an uncertain aviation outlook (terrorists attacks and slowing global economy), many airlines are also extending flying hours of aircraft as much as possible, with the low-oilprice environment helping to boost profitability in an industry ravaged by losses.

Even with more checks shifted from hangars to apron, SIE is challenged by the space constraints in Changi airport as there is a limit to the number of aircraft being allowed to be grounded for overnight checks. Therefore, we see moderate growth of line maintenance growth in the near term, in line with traffic growth in Changi.
The next stepup will only kick in by 2018 with the new Terminal 4.

The lifecycle of the new-era engines is extended while older engine models are being retired on an accelerated pace.
SIE’s key engine centres, Eagles Services and SAESL will continue to see low engine visits in the next 18 months, as Pratt & Whitney's P4000 market share in the B747s shrinks while SAESL’s Rolls Royce engines are lasting longer and only expect to return in 2018.

The 51/49 Boeing/SIE JV, Boeing Asia Pacific Aviation Services will expand SIE’s fleet management segment, allowing it to support B737s, 747s,777s and 787s in Asia Pacific.
By teaming up with SIE, Boeing in theory can offer a total aftermarket care as part of the aircraft purchase agreement. Initial work will start off with SIA’s fleet before expanding to third-party aircraft.
Management expects the segment to take a few years to grow meaningfully.

Re-rating catalysts could come from earlier-than-expected return of engines overhaul and heavy airframe MRO.
In the near term, SIE could benefit from a stronger US$ trend as engine MRO contracts are priced in US$.

LIM Siew Khee CIMB Securities | http://research.uobkayhian.com/ 2015-11-23

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