Fair value: S$4.50
26 July 2017, Singapore – SIA Engineering’s 5% y/y decline in recurring profit in 1QFY18 was slightly below our forecast which is lower than consensus average estimate. The key disappointment was the 42% y/y decline in profit contribution from SAESL due to the lower work content of engines shipped. Margin pressure remains for the core business. Eagle Services Asia was the bright spot whose higher profits helped to offset the weaker JV contributions. Although the MRO sector outlook is challenging near term, we remain bullish on SIA Engineering’s longer term prospects. Several game-changing business developments, mostly partnerships with global leading OEMs, were achieved during 1QFY18. These will significantly enhance SIA Engineering’s capabilities and competitive advantage, providing new earnings growth drivers in the longer term.
NEW MILESTONE BUSINESS DEVELOPMENTS TO DRIVE FUTURE GROWTH
1QFY18 is a significant quarter as SIA Engineering (SIE:SP) announced several milestone business developments, mostly partnerships with global leading Original Equipment Manufacturers (OEMs), during the quarter. Although these will not materially impact its near term earnings, they will significantly enhance SIA Engineering’s MRO capabilities and competitive advantage, providing new earnings growth drivers in the longer term.
- New 49%-owned engine overhaul joint venture with General Electric (GE:US, which will hold a 51% stake): This Singapore-based JV will provide a full range of engine MRO services for the GE90 and GE9X engines. The GE90 engine exclusively powers the Boeing 777-300ER and 777-200LR, and the GE9X engine is the sole engine selection for the Boeing 777X aircraft. Currently, there are 800 of these aircraft in operation and 401 on order.
- 49%-owned Eagle Services Asia has been selected as a MRO facility in Singapore for the Pratt & Whitney (UTX:US) PW1100G-JM PurePower® Geared Turbofan™ (GTF) engines: This GTF engine is one of two engine types that power the bestselling new generation Airbus A320neo aircraft. Currently, there are 116 A320neo aircraft in service and 3566 aircraft on order. See our previous report for more details:
- Embraer (ERJ:US) E-Jets authorized service centre: Embraer Asia Pacific has appointed SIA Engineering (Philippines) Corporation as an E-Jets authorized service center for its family of E170, E175, E190 and E195 aircraft. There are 150 E-Jets operating in the Asia Pacific region excluding the number of E-Jets on order.
- New 100%-owned line maintenance subsidiary in Japan, starting with services in Osaka: SIA Engineering will establish a new line maintenance station at Kansai International Airport which is one of the largest and busiest airports in Japan. This will not only help to serve Singapore Airlines (SIA:SP) and Scoot’s flights but also other third party airline customers. This will raise SIA Engineering’s line maintenance network to 37 airports in 8 countries (including Australia, Hong Kong, Indonesia, Japan, Philippines, Singapore, United States and Vietnam). SIA Engineering’s line maintenance network collectively handles over 900 flights daily for more than 70 airlines. SIA Engineering plans to broaden its service offerings and establish line maintenance stations in the other airports in Japan at a later stage.
- Exploring 3D printed production parts for commercial aviation: SIA Engineering has signed a Memorandum of Understanding with Stratasys (SSYS:US) to explore the establishment of a joint venture to accelerate the adoption of 3D printed production parts for commercial aviation. The two companies plan to establish a Singapore-based Additive Manufacturing Service Centre, offering design, engineering, certification support and part production to SIAEC’s partners and customers.
1QFY18 RESULTS REVIEW
- Ignore the sharp y/y decline in headline profits: The 82% y/y decline in 1QFY18 headline net profit is not representative of SIA Engineering’s underlying performance as the prior year included one-off gains related to the divestment of HAESL and its corresponding impact on staff costs. Excluding these one-off items, recurring profit fell 5% y/y to S$36m in 1QFY18 (April-June 2017).
- Results slightly weaker than our forecasts: SIA Engineering’s 1QFY18 S$36m net profit is disappointing to the market as our full year FY18 (year to March) net profit forecast of S$156m is 10% below consensus average estimate.
- Margins still under pressure: Operating profit margin, excluding last year’s one-off additional staff costs, weakened 1ppt y/y to 6.6% in 1QFY18.
- Strong profit contribution from 49%-owned associate Eagle Services Asia (ESA): Profit contribution from associates, mainly driven by ESA, rose 26% y/y which more than offset the 42% decline in profit contribution from 50%-owned Singapore Aero Engine Services (SAESL), its JV with Rolls-Royce. Associates and joint ventures accounted for 52% of SIA Engineering Group’s pre-tax profits in 1QFY18.
- Balance sheet still strong: Annualized ROE would be 7%. SIA Engineering’s financial position remains strong with a net cash balance of S$622m or S$0.55 per share at the end of June 2017. Note that SIA Engineering went ex-dividend of S$0.14 per share on 25th July 2017.
- Management is still guiding for a challenging outlook for the Maintenance, Repair & Overhaul (MRO) sector, in line with our expectations. However, we remain bullish on SIA Engineering’s longer term prospects. See our initiation research report for more details:
Chart: SIA Engineering 1QFY18 Results at a Glance
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