SIA Engineering - OCBC Investment 2017-07-03: Partnerships To Drive Future Growth

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SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Partnerships To Drive Future Growth

• A320neo to power ESA’s future growth.
• Forming JV with GE Aviation.
• No near-term catalyst.

New revenue stream for ESA 

• SIA Engineering Company Ltd (SIAEC) recently announced its existing JV with Pratt & Whitney (P&W), Eagle Services Asia (ESA), has been selected as the maintenance, repair and overhaul (MRO) facility in Singapore for P&W’s PW1100GJM PurePower® Geared Turbofan™ (GTF) engines, which is one of the two engine options that powers the A320neo aircraft family (includes A319neo and A321neo). 
• ESA will invest an estimated US$85m to equip the facility to perform MRO services on the GTF engines. 
• We view this positively as it creates a new revenue stream for ESA, especially since profit contributions from ESA have been on a declining trend mainly due to the retirement of the older four-engine B747-400 aircraft, which is powered by P&W’s PW4000 engines. 
• Note that PW4000 engines were once the main revenue driver of ESA. ESA also services one of the engine options used to power the A380 aircraft, which is also experiencing falling demand with the more fuelefficient aircraft preferred.

Expected growth in A320neo fleet to lift MRO demand 

• Unlike the B747 and A380, which are falling out of favour with airlines, the single-aisle A320neo aircraft family has fast growing demand with the proliferation of low cost carriers across the world.
• According to Airbus as at 31 May 17, there are 5,053 A320neo orders, of which only 116 had been delivered, implying a backlog of 4,937 A320neo aircraft firm orders, of which more than 30% of these aircraft are ordered by airlines in the Asia-Pacific region. For comparison, there are only 104 firm order backlog for A380 and 20 unfilled orders for B747 as at end-May 17. 
• In our view, the data clearly indicate the expected strong growth in demand for the MRO services of the GTF engines over the longer-term, as more A320neo aircraft are delivered over time. Airbus’ overall backlog of jetliners to be delivered (end-May 17) represents about eight years of production.

Maintain HOLD with unchanged S$3.75 Fair Value 

• Hence, we do not expect any near to medium term impact but are positive that SIAEC’s partnerships will be one of the key drivers for future growth. 
• Maintain HOLD with an unchanged S$3.75 FV for now.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-07-03

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 3.750 Same 3.750