SIA Engineering - CIMB Research 2018-02-03: 3QFY18 Little Insight To Get Excited

SIA Engineering - CIMB Research 2018-02-03: 3QFY18: Little Insight To Get Excited SIA ENGINEERING CO LTD S59.SI

SIA Engineering - 3QFY18: Little Insight To Get Excited

  • SIA Engineering's 3QFY3/18 profit of S$54.8m (+44% q-o-q, +4% y-o-y) was above our expectation and consensus at 37%/34% of FY18F. 9MFY3/18 profit (S$129m) formed 89% of FY18F.
  • The outperformance was due to a +387% q-o-q rise in JV’s profit to S$22.9m. Few details were provided on this. 3Q was also seasonally stronger for associates/JVs.
  • Revenue from line maintenance and airframe MRO remained steady q-o-q at S$271m.
  • 3Q EBITDA margin hovered at 12%. Maintain REDUCE.

JV profit jumped 387% q-o-q, but there could be one-offs

  • Profit contribution from JVs (mainly SAESL) of S$22.9m was up 387% q-o-q and 60% yoy. Profit from associates, however, was steady at S$17.9m. Together, JV and associate profits were up 78% q-o-q and 29% y-o-y to S$40.8m, the highest since 3Q14. 
  • SIA Engineering offered little explanation in its announcement for the increase. 
  • Note that JV profit grew 190% q-o-q to S$14m in 3Q17 due to the pre-committed baseload of work in the engine shop due to the divestment of HAESL. The increase was wiped out in 4Q17 and JV profit returned to S$5m. Therefore, we make no changes to our EPS estimates for now.

Steady quarter for its core business

  • Revenue was steady q-o-q and y-o-y at S$271m. Fleet management weakness was partially mitigated by an increase in line maintenance revenue.
  • EBTIDA margin was steady at 12% in 3Q18. Staff costs remained at 18% of its operating expenses (S$253m). Materials and sub-contractor costs also remained at S$78m, suggesting that airframe overhaul still has not picked up significantly.

Transformation not apparent yet

  • SIA Engineering has embarked on a “major project” to improve productivity, investing in data analytics and innovation to shorten turnaround time. There are signs of efforts to battle against the structural headwinds of high costs and competition. However, we think it will take time to bear fruit.

Maintain REDUCE

  • The stock is still expensive at 25x FY19 P/E against lacklustre earnings growth. We would take another look at the stock if SIA Engineering makes progress in narrowing its operating losses in airframe repair, or a sustainable turnaround from JVs.
  • Our Target Price of S$3.13 is unchanged, still based on DCF valuations (WACC: 6.4%, LTG: 1%). 
  • Higher-than-expected costs could de-rate the stock. 
  • Upside risks include stronger-than-expected pick-up in volumes for MRO.

LIM Siew Khee CIMB Research | 2018-02-03
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 3.130 Same 3.130