• 3QFY15 results disappoint
• Decline in aircraft checks to continue
• Unchanged FV; maintain SELL

3QFY15 results below expectations

SIA Engineering Company's (SIAEC) weak performance continues as it reported a 23.5% YoY drop in its 3QFY15 PATMI to S$46.3m. The lower PATMI is mainly due to a 6.5% decline in its 3QFY15 revenue to S$265.3m as well as a 33.2% decrease in share of profits from associated and JV companies to S$25.3m. Similar to the trends seen in 1HFY15, SIAEC’s 3QFY15 saw lower revenue from its airframe and component overhaul services (ACS) segment on lower heavy checks though mitigated by higher fleet management programme (FMP) and line maintenance (LM) revenue. The plunge in share of profits from associated and JV companies came mainly from the engine repair and overhaul centres as 3QFY15 contributions fell 54.9% YoY to S$15.6m on lower in engine shop visits as engines’ check intervals are deferred with improvement modifications. SIAEC’s 9MFY15 PATMI were below expectations with a 29.2% drop to S$141.9m, as it formed 70.8% and 71.8% of consensus and our FY15F forecasts, respectively.

Outlook remains challenging for next 12 months

We expect the issue of deferred aircraft checks to have negative impact on SIAEC’s ACS revenue for the next 12 months. While FMP and LM revenue is likely to continue to show improvements, the higher subcontract costs will negate partially the increase in revenue. Efforts put in to manage costs through productivity and operating efficiencies is starting to bear fruit as SIAEC’s operating margin improved 3.6ppt QoQ to 9.2% in 3QFY15 and recorded a 9.5% reduction in staff costs. However, we believe there is a limit to which SIAEC can achieve through such cost management and we think the savings is unable to offset much of the decline in revenue in the near-term.

Unchanged FV; maintain SELL

Hence, given the disappointing results and still-muted outlook, we decrease our FY15F and FY16F PATMI forecasts by 3.8% and 8.9%, respectively. Rolling forward our valuations, our FV estimate remains unchanged at S$3.80 based on 20x FY16F PER (0.25 SD above 3-year historical average). Maintain SELL.

Source: OCBC Research - 4 Feb 2015