• Strong 9MFY18 results
• Core business still muted
• Rolling forward our valuations

9MFY18 PATMI Met 85% of Our Forecast

SIA Engineering Company Ltd’s (SIAEC) 3QFY18 PATMI grew 4.2% YoY to S$54.8m, driven mainly by a 29.1% jump in share of profits of associates and JVs to S$40.8m due to higher contributions from the repair and overhaul centres. 3QFY18 revenue fell 0.5% YoY to S$271.0m due to lower fleet management revenue but partially mitigated by higher line maintenance (LM) revenue. However, 3QFY18 operating profit declined 27.8% YoY to S$18.2m as operating expenses grew 2.3% to S$252.8m.

For 9MFY18, revenue increased 1.2% YoY to S$818.5m on higher line maintenance revenue while core operating profit fell 19.6% to S$55.8m as operating expenses rose 3.2% to S$762.7m. However, on similar reason as 3QFY18, SIAEC’s 9MFY18 share of profits of associates and JVs jumped 22.0% YoY to S$84.8m. Consequently, 9MFY18 exceeded our expectations as core PATMI grew 2.9% YoY to S$128.2m, and met 85% of our FY18F forecast.

Engine MRO to Support Earnings Growth

Looking ahead, we expect the core business to stay muted in the near-term as the industry continues to undergo a structural change with a shift towards an increase in lower margin LM needs for the new aircraft/engine models. However, we expect earnings to be lifted by the improving engine MRO segment (mainly contributions from associates and JVs).

In our view, SIAEC will benefit from more Trent 1000 (used on B787) engine checks due to problems with the engine blades, which require workshop visits for the affected engines. Over the longerterm, we remain positive over SIAEC’s strategy to pursue expansion of its LM network globally, as well as its partnerships with Pratt & Whitney and GE to provide MRO services of the engines that are being used on the new aircraft models.

Raising Our FV to S$3.70

All considered, we expect growth from engine MRO to support earnings in the near to medium term, and raise our FY18F-FY22F PATMI by 0%- 10%. Rolling-forward our DCF valuation to FY19- FY23 assumptions, our FV increases from S$3.35 to S$3.70, supported by a decent FY19F dividend yield of 3.9% based on 2 Feb 18 closing price of S$3.33.

Source: OCBC Research - 5 Feb 2018