• 2QFY15 PATMI plunged 40.7% YoY
• More aircraft checks deferred
• Downgrade to SELL

Disappointing 2QFY15 results

SIA Engineering Company's (SIAEC) reported a 3.0% YoY decline in its 2QFY15 revenue to S$285.2m and a 40.7% drop in PATMI to S$42.1m. Its 1HFY15 results were below expectation as its revenue and PATMI formed 47.8% and 34.5% of our FY15 forecasts. SIAEC’s 1HFY15 revenue decreased 0.7% to S$579.3m, due to lower airframe and component overhaul services (ACS) revenue from fewer aircraft checks, partly offset by the higher fleet management programme (FMP) revenue. Its 1HFY15 PATMI declined 31.7% to S$95.6m, on higher subcontract costs and a 36.2% YoY drop in share of profits from associated and JV companies to S$29.1m. SIAEC’s key JV, SAESL (services Rolls-Royce engines) experienced a 30% reduction in works on engine cowls due to improvement modifications that reduced engine shop visits. Its main associate, Eagle Services Asia, also saw reduction in earnings as Pratt & Whitney engines are near the end of life-cycle.

Longer interval between checks

We think SIAEC is going through the cyclical period where customers deferring aircraft checks (i.e. increase interval between checks). The number of ‘C’ checks declined from 37 in 1HFY14 to 34 in 1HFY15 and more significantly for ‘D’ checks, the number dropped from 23 in 1HFY14 to 10 in 1HFY15. The number of ‘A’ checks remained resilient at 192 in 1HFY15 compared to 193 in 1HFY14. Note that ‘D’ checks has the most impact with an estimated revenue of S$3mS$6m per check. With lower revenue from ACS and high staff costs, SIAEC reported an S$7.4m operating loss for its ACS segment. We expect SIAEC to face this situation for at least the next 12 months, until which, the demand for checks from customers should pick up gradually as their extended interval runs out.

Lower FV; Downgrade to SELL

With disappointing results, expected depressed earnings for the next 12 months, and change in analyst coverage, we cut our FY15 and FY16 PATMI by 28.7% and 18.1% respectively. Hence, we lower our FV from S$4.71 to S$3.80 based on 19.0x blended FY15/16F PER, and downgrade to it SELL.

Source: OCBC Research - 6 Nov 2014