SIA Engineering - OCBC Investment 2018-02-05: Strong Contributions From Associates And JVs

SIA Engineering - OCBC Investment 2018-02-05: Strong Contributions From Associates And JVs SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Strong Contributions From Associates And JVs

  • Strong 9MFY18 results.
  • Core business still muted.
  • Rolling forward our valuations.

9MFY18 PATMI met 85% of our forecast 

  • SIA Engineering Company Ltd’s (SIAEC) 3QFY18 PATMI grew 4.2% y-o-y to S$54.8m, driven mainly by a 29.1% jump in share of profits of associates and JVs to S$40.8m due to higher contributions from the repair and overhaul centres. 
  • 3QFY18 revenue fell 0.5% y-o-y to S$271.0m due to lower fleet management revenue but partially mitigated by higher line maintenance (LM) revenue. However, 3QFY18 operating profit declined 27.8% y-o-y to S$18.2m as operating expenses grew 2.3% to S$252.8m.
  • For 9MFY18, revenue increased 1.2% y-o-y to S$818.5m on higher line maintenance revenue while core operating profit fell 19.6% to S$55.8m as operating expenses rose 3.2% to S$762.7m. However, on similar reason as 3QFY18, SIAEC’s 9MFY18 share of profits of associates and JVs jumped 22.0% y-o-y to S$84.8m. 
  • Consequently, 9MFY18 exceeded our expectations as core PATMI grew 2.9% y-o-y to S$128.2m, and met 85% of our FY18F forecast.

Engine MRO to support earnings growth 

  • Looking ahead, we expect the core business to stay muted in the near-term as the industry continues to undergo a structural change with a shift towards an increase in lower margin LM needs for the new aircraft/engine models. However, we expect earnings to be lifted by the improving engine MRO segment (mainly contributions from associates and JVs). 
  • In our view, SIAEC will benefit from more Trent 1000 (used on B787) engine checks due to problems with the engine blades, which require workshop visits for the affected engines. 
  • Over the longer term, we remain positive over SIAEC’s strategy to pursue expansion of its LM network globally, as well as its partnerships with Pratt & Whitney and GE to provide MRO services of the engines that are being used on the new aircraft models.

Raising our Fair Value to S$3.70 

  • All considered, we expect growth from engine MRO to support earnings in the near to medium term, and raise our FY18F-FY22F PATMI by 0%- 10%. 
  • Rolling-forward our DCF valuation to FY19- FY23 assumptions, our Fair Value increases from S$3.35 to S$3.70, supported by a decent FY19F dividend yield of 3.9% based on 2 Feb 18 closing price of S$3.33. 
  • (Upgrade to BUY)

Eugene Chua OCBC Investment | http://www.iocbc.com/ 2018-02-05
OCBC Investment SGX Stock Analyst Report BUY Upgrade HOLD 3.70 Up 3.350