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

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.

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.

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