HAECO’s FY13 results were hurt by poor performance at HAESL. Management has guided for weak near-term outlook. Issues at HAESL offer a negative read-through to SIAEC.

Pause in growth at Rolls-Royce engine shops but overall outlook still positive.

Maintain BUY on SIAEC but cut TP to SGD5.75. Trim FY15E-17E earnings by 2-5% to factor in latest developments.

Read-through from HAECO’s results

HAECO reported a disappointing set of results following weaker-than-expected performance at HAESL (click for note). Management cited two reasons for the HAESL disappointment. Firstly, the early retirement of B747 aircraft by global airlines meant that maintenance demand for the RB211 engines declined. Secondly, the improved reliability of the Trent 700 engines used on the A330s has led to fewer shop visits. As a result, HAECO said the near-term outlook for HAESL would remain weak.

What’s Our View

HAECO’s results pose a mild negative for SIA Engineering (SIAEC). First off, it could receive lower dividends from its 10% stake in HAESL. Secondly, the issues plaguing HAESL could also affect SAESL (see Figures 4 and 5 to understand the capabilities of HAESL and SAESL and their common customers). However, the impact on SAESL would be less pronounced as the company is not exposed to the structural decline in demand for maintenance work on RB211 engines. We do not think the overall positive outlook for the Rolls-Royce engine shops has suffered as long-term earnings growth is still bright; growth is merely delayed due to the timing of the shop visits. The Trent engine fleet is expected to double in five years’ time and this will underpin MRO demand for the engine. We trim our FY15E-17E earnings by 2-5% to reflect the latest developments and our TP thus falls to SGD5.75 (21x FY15E P/E) from SGD5.88. Maintain BUY.

Source: Maybank Kim Eng Research - 13 Mar 2014