SIA Engineering - OCBC Investment 2016-05-11: Weak Near-Term Outlook

SIA ENGINEERING CO LTD S59.SI

SIA Engineering - WEAK NEAR-TERM OUTLOOK

SIA Engineering Company Ltd (SIAEC) recorded a 6.6% YoY increase in 4QFY16 revenue to S$294.2m, but PATMI came in flat at S$41.4m, as contributions from associated and JV companies came in 14.1% lower at S$18.3m.
For FY16, revenue fell slightly by 0.7% to S$1.11b due to lower revenue contribution from its maintenance, repair and overhaul (MRO) business, but partially mitigated by higher line maintenance (LM) and fleet management (FM) revenue.
While FY16 operating expenses dropped at a higher rate of 2.7% to S$1.01b, share of profits of associated and JV companies fell by 11.4% to S$94.2m due to lower work content on engines.
Consequently, FY16 PATMI still came in 3.7% lower at S$176.6m, but stripping out one-off items, core PATMI rose 2.0% to S$181.0m, in-line with consensus.

In our view, MRO business will likely remain weak over the next 12 months due to longer check intervals of new aircraft and lower work content on newer/improved engines with increased reliability.
However, we note that SIAEC has been entering into collaboration with OEMs through JVs or partnership agreement to adjust its business model to the changing landscape of the MRO business for long-term growth.
Among many others, these partnerships include:
1. forming strategic partnerships as on-wing services provider for Rolls-Royce (e.g. A350 and B787 engines) and on-site support provider for Snecma (e.g. A320neo and B737 engines) in Asia Pacific (APAC);
2. JV with Boeing to exclusively provide FM services to Boeing’s APAC customers that buy FM packages at point of sale of aircraft; and
3. JV with Airbus to provide airframe maintenance and cabin upgrades for A380 and A350.
However, given an estimated gestation period of three years, these partnerships are unlikely to contribute materially in the near-term.

With a decent FY17F dividend yield of 3.8%, maintain HOLD with unchanged FV of S$3.70.
However, we believe longer term investors may look for buying opportunities closer to S$3.50.

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2016-05-11

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Same 3.70