SIA Engineering - UOB Kay Hian 2018-05-17: 4QFY18 Beats Street Estimates; SIAEC Expects More Engine Checks

SIA ENGINEERING CO LTD SGX: S59

SIA Engineering - 4QFY18 Beats Street Estimates; SIAEC Expects More Engine Checks

While 4QFY18 JV & associate income fell short of expectations, revenue from engine maintenance segment rose 28% y-o-y in 2HFY18, the fastest pace in more than five years.
In addition, SIAEC expects this segment to grow further in FY19 and plans to grow its line maintenance earnings.
Given that the latter is an asset-light business, the operating leverage should be high.
Maintain BUY. Target price: S$3.80. At our target price, the stock trades at ex-cash PE of 19.6x.

Excluding S$3.5m in impairment charges, earnings would be 10% below our estimate. Still, operating profit surprised to the upside as staff cost fell faster than the decline in revenue.
Associates and JV earnings fell 7.4% y-o-y, attributed to lower share of profits from engine and component centres. We also believe that the JVs and associates were impacted by a weaker US dollar.
Core earnings remained flat for the quarter.
SIA Engineering (SIAEC) declared a 9 S cents final dividend, unchanged y-o-y.

Plans to boost line maintenance. SIAEC has expanded its line maintenance business to 39 airports in 8 countries and is seeking to increase this further as this segment remains the most profitable. SIAEC also aims to shift focus to producing and maintaining cabin interiors as new models of aircrafts are built to have lower servicing needs. The company has formed a JV with Stratasys, a leading 3D printing and additive manufacturing firm.
Engine overhaul and component revenue rose at the fastest rate (+28% yoy) in more than 5 years in 2HFY18. Profits from engine overhaul (excluding component) rose 29% y-o-y in FY18. SIAEC changed the reporting classification for the segment, breaking it up to engine repair and component sales, thus we are unable to accurately access profit growth for the engine segment in 2HFY18. Still our thesis that engine shop visits are rising appears to be validated.
SIAEC also expects higher Trent 1000 shop visits in FY19. Rolls Royce Trent 1000 engines have been plagued by corrosion on the Trent 1000 fan blades and SIAEC expects to see greater number of work from its JV partner, SAESL. Thus, we expect the segment to be the key earnings driver for FY19.

Stay invested; SIAEC is rapidly investing in new JVs to offset the decline in airframe maintenance. The gestation time for such returns might not be immediate but it will entrench SIAEC’s position as a leading maintenance, repair and overhaul (MRO) player. We also expect earnings to improve in FY19, underpinned by more engine checks.
Adoption of IFRS1 will lower book value but boost forward earnings due to lower depreciation base. SIAEC guided that it will have to reduce its book value by 5% following the adoption of IFRS1. However, there would be an incremental impact to P&L of S$2.0m, S$1.9m and S$1.6m for FY19-21 respectively due to lower depreciation arising from a lower asset base.

We lower our FY19 net profit estimate by 5.3%, factoring in lower airframe revenue for the year.

We continue to value SIAEC on a discounted free cash flow basis, accounting for dividends from associates and JVs.
Maintain BUY but we lower our fair value to S$3.80, primarily due to lower earnings for FY19.

K Ajith UOB Kay Hian | https://research.uobkayhian.com/ 2018-05-17

SGX Stock Analyst Report BUY Maintain BUY 3.80 Down 4.000