■ 2Q16 net profit missed on lower-than-expected engine shop performance. EBIT was much better, but from a low base.
■ We cut FY3/16E EPS 6% to reflect the weak results (FY3/17- 18E largely unchanged). Airline maintenance should increase in FY16 and fleet retirement should slow on lower oil prices.
■ Maintain HOLD. TP lifted 14% to SGD3.75 after rolling forward to FY3/17E EPS with target PER unchanged at 20x.
Weaker-than-expected engine performance
2QFY16 net income was SGD44.5m (+5.7% YoY, +7.7% QoQ), marginally below our expectation. The performance of SIAEC’s engine shops (-41.5% YoY) continued to lag. Overall, the profit contribution from associates and joint ventures dipped 35.7% YoY to SGD18.7m. Despite this weakness, the group reported significantly better EBIT of SGD27.0m, albeit off a low base a year ago. Interim DPS was kept unchanged at 6.0 SGD cts. Management guidance remains cautious due to the challenging operating environment.
Maintain HOLD amid signs of bottoming
We see some signs of a bottom. The recent rebound in flight traffic at Changi Airport (see Figure 2) should benefit SIAEC's line maintenance business. Next year, airlines may increase capacity and slow their fleet retirement in response to lower oil prices. This should drive a cyclical pick-up in the maintenance workload in the year ahead.
However, we stay neutral on the stock as valuations remain unattractive. We cut our FY3/16E EPS by 6% to reflect the weaker-than-expected results, but keep our FY3/17-18E forecasts largely unchanged. Our TP is lifted to SGD3.75 (from SGD3.30) as we roll forward our valuation basis to FY3/17E with PER of 20x unchanged (0.5SD above the 10-yr average). Maintain HOLD. We prefer ST Engineering (BUY, TP SGD3.85) due to its more attractive valuation. (Read Report)
Read Related Reports
1) SIA Engineering Company Ltd - Engine problems, but Line Maintenance improves by Phillip Securities Research, published on 4 November 2015
2) SIA Engineering - Core operating margin improves by DBS Group Research, published on 3 November 2015
3) SIA Engineering - Cushioned by line maintenance by CIMB Research, published on 2 November 2015
Source : Maybank Kim Eng Research