SIA Engineering - CIMB Research 2016-11-02: Catch 22

SIA Engineering - CIMB Research 2016-11-02: Catch 22 SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Catch 22

  • Management clarified at the briefing that the cut in interim dividend is a reflection of weaker yoy profit, isolating the divestment gain. We still hope for special dividend.
  • SIE is in a catch 22 situation. To protect its market share, SIE either shares the pie with aircraft manufacturer or provides solutions that reduce maintenance costs.
  • We cut our FY17-19F EPS forecasts by 10-12% to reflect weaker FMP, slower growth in airframe MRO as well as lower contribution from associate/JVs.
  • Downgrade to Hold from Add with a DCF-based (WACC: 6.4%) TP of S$3.77.

Holding on for special dividend 

  • We still expect SIE to declare special dividend in 4Q17 from the c.S$150m net gain arising from HAESL divestment. 
  • Management guided for 80-90% dividend payout on recurring earnings, translating to FY17 DPS of 12 Scts. 
  • Assuming SIE distributes 50% of the HAESL gain, DPS could be added by another 6-7 Scts, bringing total DPS to 18-19 Scts (4.8% yield). 
  • Capex is guided to be in the range of S$40m-70m p.a.

Lack of critical mass for now but SIA’s de-lease of 5 A380 helps 

  • We think SIE lacks critical mass for airframe component & component overhaul (AMC) as 1H17 revenue shrank 6% from 2H16 to S$219m due to 
    1. timing difference as less aircraft due for heavy checks, and 
    2. more A checks shifted from hangar to apron.
  • Based on its 7-year performance since 2010, we think AMC needs a minimum 6-month revenue of S$230m-240m to breakeven. The next round for heavy checks is likely in 2H18 as SIA de-leases its first five A380s and restoration work is required.

FMP dented by the loss of Tiger Airways 

  • Tiger Airway’s non-renewal of Fleet Management Programme (FMP) contract (switched to Airbus solution) has resulted in the drop in overall fleet to 130 (2H16: 156). This has also caused the revenue for FMP to plunge by 31% since 2H16. 
  • To combat competition from aircraft manufacturers in after-sales services, SIE has formed a JV with Boeing for FMP and Airbus for heavy maintenance.

Operating loss may continue until 2H18 for AMC and FMP 

  • Repair and Overhaul (comprised of AMC and FMP) returned into operating loss of S$8.7m in 1H17. This also led to SIE’s 1H17 NP being below at 40% of our FY17 forecast. 
  • The S$3.3m operating profit in 2H16 was not sustained. 
  • The weakness in volume above could continue until 2H18 before heavy checks for A380 return. The new generation aircraft (A350 and B787) only require heavy checks in 2021-2022.

Changi volume is still pivotal

  • The bright spot lies with line maintenance. Revenue grew 5% from 2H16 to S$246m in 2H17, thanks to strong data from Changi Airport. 
  • SIE handled 70,078 aircraft (+2.6% yoy) and delivered an operating profit of S$52.9m and operating margin of 21.5%.

Low oil price works to Pratt & Whitney’s favour 

  • Share of associates (Eagle Services) of S$12.3m remained stable qoq but grew 81% yoy thanks to low oil price that had possibly delayed the retirement of B747s. This may not be sustainable in the event of oil price hikes. However, share of JV (SAESL) faces new challenges of fewer Rolls Royce engines workshop visits and supply chain issues.

Downgrade from Add to Hold; lower target price of S$3.77 

  • We believe SIE is being squeezed, not only from aircraft manufacturer, but also other MRO competitors. To preserve its market share, it has to either reduce the manhours or rates. This could be a long-term structural headwind which is a risk to our call.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-11-02
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 3.77 Down 4.160