■ Lower work content due to longer intervals for checks and engine overhauls.
■ Better margins at line maintenance with more short overnight checks at apron.
■ Sunset Pratt & Whitney engines will continue to put pressure on associate but JV with Rolls Royce is still relevant as the OEM retains its market share.
■ The stock is trading at 21x P/E FY17 and could have priced in the recovery in volume as well as steady growth in Changi airport. Maintain Hold.
Airframe could have bottomed
We met management at the 1H16 results briefing. Utilisation remains high in SIE’s Singapore’s hangars but content of checks has reduced, resulting in the 12% yoy drop in repair & overhaul revenue in 1H16 vs. 1H15. However, the downward trend could have bottomed as revenue only dipped 1% vs. 2H15. The segment also recorded a narrower yoy operating loss of S$6.7m (1H15: S$8.8m).
Lower sub-con and staff costs
Subcontractor’s costs (16% of total operating expenses) fell 27% yoy and 5% qoq due to fewer projects requiring third parties’/JV’s help. Note that sub-con costs could fluctuate depending on the type of work that SIE undertakes (eg. turnkey). Staff costs (47% of opex) retreated by 5% yoy and qoq from steady headcount and controlled overtime. A lower profit-sharing formula was also derived with lower bonus.
More apron work = better margin
Line maintenance’s 1H16 operating profit (S$54.6m) was 20% above 1H15 and 3% higher than 2H15. SIE handled 68,332 flights in Changi 1H16 (1H15: 67,090, 2H15: 66,973). There have also been more overnight checks at the apron/line as airlines maximise flights’ utilisation of older aircraft (B777s) instead of parking their aircraft in the hangars which compromise flying hours by days/ weeks. This asset-light structure and short turnaround time could sustain line maintenance’s op. margin of 24%.
Pratt & Whitney fading
Associates contribution slumped 53% qoq in 2Q16 to S$6.8m due to provision for pension top-up and provision for doubtful debts. We expect Eagles Services, servicing Pratt & Whitney engines to remain weak as P4000 that power B747s are replaced by B777-300ERs (GE90) and B787 Dreamliner (Rolls Royce’s Trent 1000 and GEnX).
Rolls Royce is still relevant
JV contribution was up 25% qoq to S$11.9m in 2Q16 due to timing of engine shop visits. SAESL, which services Rolls Royce engines will continue to be relevant especially the Trent 1000 and Trent XWB (A350) engines. Trent 1000 entered the market in 2011 and Trent XWB in 2013. With the engine cycle lasting up to six years (vs. four to five years previously), management expects the next engine cycle to return in 2018/19.
Maintain Hold, roll forward target price to CY17
We roll forward our DCF-based target price to CY17 (WACC: 6.7%). Re-rating catalysts could come from earlier-than-expected return of engines overhaul and heavy airframe MRO. In the near term, SIE could benefit from a stronger US$ trend as engine MRO contracts are priced in US$. (Read Report)
Source : CIMB Research