SIA Engineering - CIMB Research 2017-07-25: Earnings Have Not Recovered

SIA Engineering - CIMB Research 2017-07-25: Earnings Have Not Recovered SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Earnings Have Not Recovered

  • SIE's 1QFY3/18 net profit of S$36m (-13% yoy, -21% qoq) is broadly in line with our expectations and consensus, forming 22% of our FY18F.
  • Overall revenue steady at S$273m, likely helped by line maintenance. Lower materials costs could mean airframe MRO remains weak.
  • Earnings could have been better if associates profit did not lose steam qoq..
  • Maintain Reduce and target price of S$3.86, still based on DCF (WACC: 6.4%). Rerating catalysts could come from earnings pick-up and corporate action from SIA.

Unexciting generally 

  • We consider the 1Q results in line as subsequent quarters could see some lumpiness in jobs, lifting revenue. 
  • The key positive was steady revenue, which we think is in line with Changi’s flights handled. Costs have been relatively well contained with staff costs up 1% yoy to S$254m (50% of operating costs). 
  • Material costs were down by 16% qoq and 7% yoy to S$43m (17% of operating costs), which is likely due to weak airframe MRO. The EBIT margin was steady yoy at 11.7%.

Could be better if associates profits kept their momentum 

  • Associates profit contribution dropped 24% qoq (but up 26% yoy) to S$17m, while JV contribution was on a downward trend of -14% qoq and -42% yoy to S$4m. Associates had delivered two consecutive quarters of qoq growth (average 33%) starting from 2Q17 as a result of more engine visits from Pratt & Whitney with the delays in retirement of old aircraft, but we believe this income source could have peaked in 4Q17. 
  • We see downside risks to our earnings if associates profits taper off in the subsequent quarters.

SIA may find it hard to part with the cash 

  • Net cash stood at S$602m, boosted by dividends from associates and JV during the quarter. With this, we think SIE is likely to remain a cash cow for SIA, especially when the airline is gradually turning into a net debt position. This makes the divestment of SIE harder to justify.

Maintain Reduce and target price 

  • SIE’s share price has weakened by 11% in the recent month, but we believe it is still not time yet to be excited about the stock, given that its valuation at 26x FY19F P/E is above its 5-year mean of 24x. 
  • Earnings downside could stem from longer intervals between heavy checks and weaker contribution from associates. 
  • Upside risk could come from earnings accretive M&A or corporate action at SIA’s level. 
  • Maintain Reduce.

LIM Siew Khee CIMB Research | 2017-07-25
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 3.860 Same 3.860