SIA Engineering - Maybank Kim Eng 2016-05-11: Not Taking Off Yet

SIA Engineering - Maybank Kim Eng 2016-05-11: Not Taking Off Yet SIA ENGINEERING CO LTD S59.SI 

SIA Engineering (SIE SP) - Not Taking Off Yet 


Not a swift rebound; Maintain HOLD 

  • We believe earnings could stay depressed for another year as its outlook remains challenging. 
  • FY3/17-18 EPS cut by 12-16%. 
  • While the increase in flight traffic may lead to higher workload for its Line business, headwinds at its engine shops remain. 
  • TP raised to SGD3.70 (from SGD3.61) as we roll forward our valuation basis to FY3/18E EPS
  • Our unchanged target multiple of 20x (0.25SD above 10-year mean) reflects its improving EPS profile, albeit off a low base. 
  • While our expectations of a special dividend may lift its stock price near term, we doubt a rally can be sustained with the muted earnings in the year ahead. 
  • Maintain HOLD. 

4Q16 inline; No special DPS yet 

  • 4Q16 core net income of SGD41.4m was in line. 
  • Full-year earnings made up 103% of our forecast. 
  • A stronger 2H performance helped reduce losses at its repair & overhaul business. This was offset by a 10% improvement in Line Maintenance profits. 
  • Share of profits from associated companies and joint ventures fell by 11.4% to SGD94.2m due to persistent weakness at its engine shops. 
  • Its stake in HAESL was reclassified as “asset held for sale” due to the ongoing restructuring with its revaluation gain booked to equity. We expect a special payout upon completion. 
  • Our FY17 DPS of 23 cts includes 9 cts of special distribution. 

Positives from pick-up in flight traffic at Changi… 

  • Flight traffic at Changi Airport has been on an uptrend. 
  • Latest data (Mar 2016) showed that annual flight count of 351k is a 3.5% YoY increase. This should lift the workload for its Line Maintenance business. 

…but outlook for engine shops remains muted 

  • However, outlook for its engine shops remains muted. 
  • While the longterm outlook for SAESL remains positive, we continue to see an uncomfortable transition period near term. 
  • Fleet renewal of key customers and improved engine reliability are leading to a decline in workload. 
  • Performance of Eagles Services Asia is also unlikely to stage a strong rebound due to the structural decline for the PW4000 engines. 
  • These headwinds will continue to weigh on almost half its earnings. 



Briefing notes 


 Investing for the future. 

  • The company sees a need to invest into new technology and form strategic partnerships to better position the company for the future. 
  • Operational improvement will also be needed in the near term. 
  • We believe this implies a period of soft earnings as the typical gestation period for a new joint venture to turn profitable is about three years. 
  • It also believes that expanding its geographical footprint is necessary and will look beyond its Singapore base. This implies that annual CAPEX will increase from historical levels of around SGD50m to c.SGD70m in the next few years. 

 Use of proceeds from sale of HAESL. 

  • It will use part of the proceeds from the sale of HAESL to invest for the future. While management did not commit to an amount needed for this purpose, it is unlikely to need the entire sale proceeds for this. 
  • We assume that it will retain half of the proceeds of c.SGD200m and distribute the balance as a special DPS of 9 cts in the year ahead. 
  • The deal is pending regulatory approval and is expected to complete in the coming quarter. 

 SAESL. 

  • While SAESL is suffering from a decline in maintenance workload, losses at this Rolls-Royce JV is unlikely. The company continues to take in engines for servicing, albeit with lower work content. 

 More work done on-wing. 

  • It believes that more work will be done on-wing and has positioned itself for this trend by signing service agreements with Rolls-Royce and Snecma for the Trent engines and CFM Leap 1A/1B respectively. These will benefit its Line maintenance business. 

 Partnering the aircraft OEMs. 

  • Its partnership with Boeing and Airbus is a strategically important move. For example, BAPAS, its JV with Boeing, will allow the company to lock in maintenance contracts at the point of aircraft sales. 

 Low oil has yet to spur a significant increase in the use of older aircraft. 

  • Some airline customers have commented that they may use their older aircraft for an extended period of time with the better economics of lower oil prices. 
  • However, the increased use of older aircraft is not happening in a significant manner yet. 

 Outlook remains challenging. 

  • While its repair & overhaul business reported a turnaround to profit in 2H16, management cautioned that its outlook remains challenging. It flagged that competition remains intense as around 90 hangars were added across the Asia Pac region over the past year. 
  • Similarly, one should not expect a big rebound at the associates & JVs in the near term. 

Swing Factors


Upside


  • Bigger-than-expected workload for Rolls-Royce Trent engines.
  • Acceleration in aircraft deployment.
  • Increased use of older aircraft on improving economics from lower oil prices.

Downside


  • Rising labour costs.
  • Fleet renewal by airline customers that could reduce maintenance work.
  • Poorly-executed acquisitions.






Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-11
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Up 3.61


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