SIA Engineering - UOB Kay Hian 2018-07-23: 1QFY19 Strong Associate Earnings Mask Deteriorating Top-line; Downgrade To HOLD

SIA Engineering - UOB Kay Hian Research 2018-07-23: 1QFY19 Strong Associate Earnings Mask Deteriorating Top-line; Downgrade To Hold SIA ENGINEERING CO LTD SGX:S59

SIA Engineering - 1QFY19 Strong Associate Earnings Mask Deteriorating Top-line; Downgrade To HOLD

  • 1QFY19 net profit is in line with expectations, underpinned by strong income from JV and associates which rose by a whopping 53.6% y-o-y, offsetting losses at the operating level. Revenue has declined y-o-y for two consecutive quarters as the repair and overhaul business appears to be more challenging than envisaged.
  • We reduce our FY19 net profit forecast by 6.7% to S$178m. Downgrade to HOLD with a lower target price of S$3.40.
  • Suggested entry level: S$3.00-3.10.



RESULTS

  • SIA Engineering’s (SIAEC) 1QFY19 net profit rose 10.4% y-o-y, in line with our expectations of 9.1% growth for FY19. Earnings were underpinned by strong growth in income from JV and associates, which rose 53.6% y-o-y, offsetting losses at the operating level.

Operating profit for 1QFY19 declined 45.5% y-o-y, below our expectations of 7.8% growth for the full year.

  • Excluding forex declined by at least 7% y-o-y. This could be due to:
    1. competitive pressures from other regional MROs;
    2. newer generation of aircraft requiring lesser checks; and
    3. transfer of Airbus MRO framework to the JV level.
  • SIAEC also notes that the MRO environment remains challenging.

Strong growth in income from JV and associates was entirely driven by higher profit of S$11.8m from engine and component centres.

  • We believe this thus raised our FY19 estimate for income from JV and associates by 14.5%.


STOCK IMPACT


We are now neutral on SIAEC as revenue has declined y-o-y for two consecutive quarters.

  • The repair and overhaul segment has been more challenging than previously envisaged, and we are unsure to what extent it can be offset by improved earnings from JV and associates.


EARNINGS REVISION/RISK

  • We lower our FY19 net profit by 6.7% to S$178m as we factor in lower revenue from the repair and overhaul business, offset by higher income from JV and associates.


VALUATION/RECOMMENDATION

  • Downgrade to HOLD with a lower target price of S$3.40. 
  • We continue to value SIAEC by S$0.20. 
  • At our fair value, SIAEC will be trading at 21.8x FY19F PE.


SHARE PRICE CATALYST

  • Improved earnings from JV and associates.





K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-23
SGX Stock Analyst Report HOLD Downgrade BUY 3.40 Down 3.800



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