SIA Engineering Company Ltd - Phillip Securities 2017-05-16: Competitive Outlook Ahead

SIA Engineering Company Ltd - Phillip Securities 2017-05-16: Competitive Outlook Ahead SIA ENGINEERING CO LTD S59.SI

SIA Engineering Company Ltd - Competitive Outlook Ahead

  • FY17 revenue and recurring PATMI were in line with our forecast and consensus expectation.
  • Final dividend rose to 9.0 cents (our forecast: 10.5 cents) from 8.0 cents in FY16. Total ordinary dividends for FY17 was 13.0 cents.
  • Announced a positive surprise of 5.0 cents special dividends (FY16: nil).

Core EBIT dragged down by higher labour cost 

  • After taking into account the $21.3 million one-off provision for profit-linked component of staff remuneration in 1Q17, labour cost was still $28.3 million higher (6.1% higher). This was attributed to over-time pay and higher headcount in some subsidiaries.

11.5% higher Line Maintenance revenue due to organic growth and restructuring 

  • This was due to more flights handled by the Group at Changi Airport and the restructuring of the business. The Group handled 2.6% more flights during the year, which was slightly lower than the 3.2% more flights handled by Changi Airport for the same period. 
  • Notably, there were 14.4% more 'A' checks done at Singapore base due to the larger A350 and B787 fleet size; and 40% more 'A' checks done at Clark base due to additional third-party work.
  • As mentioned in previous quarters, some of the work that used to be carried out in the hangar is now performed on the apron. Hence there has been a reorganisation, with airframe overhaul and cabin maintenance transferred to Line Maintenance.

Positive surprise from Pratt & Whitney associated engine shop not sustainable 

  • The higher work content at Eagle Services was due to an extension of end-of-cycle for classic fleet such as the B747 which uses the PW4000 engine. Lower fuel prices encouraged operators to delay the retirement of less fuel efficient aircraft. 
  • As in past quarters, management reiterated that the PW4000 is a mature market which will eventually be phased out.

Maintain at "Neutral" rating with higher target price of S$3.70 (previous: S$3.38) 

  • Excess capacity and aggressive pricing are some of the challenges facing the Group.
  • Improvement in technology and design has led to better airframe and engine reliability, resulting in structural issue of lower work content. 
  • Our target price gives a FY18e forward P/E multiple of 23.4x, which is higher than the Straits Times Index (STI) implied P/E multiple of 15.0x

Richard Leow CFTe Phillip Securities | 2017-05-16
Phillip Securities SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.70 Up 3.380