• Decent 1HFY18 results
• Growing importance of line maintenance
• Outlook remains cloudy

1HFY18 PATMI Met 48% of Our Forecast

SIA Engineering Company Ltd’s 1HFY18 came in largely within expectations as revenue grew 2.1% YoY to S$547.5m, driven by an increase in line maintenance (LM) revenue, but partly offset by lower fleet management (FM) revenue due to loss of contract with one of its customers. Operating expenses grew at a faster face by 3.6% YoY to S$509.9m largely due to higher staff costs and higher subcontract costs.

However, share of profits from associated and JV companies jumped 16.1% to S$44.0m, largely driven by better performance from Eagle Services Asia (ESA) due to heavier work content from the PW4000 engine. Consequently, stripping out one-off impact arising from divestment of its 10% stake in HAESL in 1HFY17, SIAEC’s 1HFY18 core PATMI grew 1.1% YoY to S$74.3m.

Uncertain Near-term Outlook

The maintenance, repair and overhaul (MRO) industry is undergoing a structural change with a shift towards an increase in LM needs for the newer aircraft/engine models. Over the near term, we believe there will be pressure over its airframe and component overhaul services (ACS) segment until the newer aircraft models are due for workshop visits, which in our view will not happen until at least three to five years later.

In addition, its JV with Rolls-Royce, SAESL, is also facing near-term headwinds on lower work content and weaker throughput due to RollsRoyce’s supply chain issue, which we do not expect to be resolved until at least FY19. That said, over the longer-term, we are also positive over SIAEC’s strategy to pursue expansion of its LM network globally, as well as its strategy in forming partnerships with aircraft and engine OEMs to provide airframe and component overhaul services, particularly with Pratt & Whitney as well as GE to provide MRO services of the engines that are being used on the new aircraft models.

Maintain HOLD

All considered, given the lack of near-term catalysts and structural change in MRO industry, we pare our FY18F/19F PATMI by 1.6%/2.3%, and lower our terminal growth assumption from 2% to 1%. Maintain HOLD as our FV decreases from S$3.70 to S$3.35.

Source: OCBC Research - 7 Nov 2017