SIAEC – CIMB

Losing its gem

Weak contribution from associates & JVs in 1Q15 (-33% yoy, -15% qoq) caught us by surprise. This, coupled with higher subcontractors’ costs drove 1QFY3/15 below expectations at 19% of our and consensus full-year forecast. We cut our FY15-17 EPS by 16% to reflect the poor quarter and slower associates & JV growth. Not only is SIE struggling with margin pressure from high labour costs in Singapore, the loss of earnings momentum from associates/JVs dampens the investment attractiveness of the stock. We downgrade from hold to Reduce. Switch to ST Engineering for a similar yield profile but lower cost pressure given its diversified geographical spread. Our lowered target price is still based on blended valuation of 19x P/E & DCF.

Margin pressure is not easing

Revenue was flat yoy but dropped by 6% qoq to S$294m with lower airframe and component MRO due to fewer planned heavy checks. Staff cost remained stable at S$127m in 1Q15, or 46% of total opex but subcontractors’ costs jumped 15% yoy to S$44m, possibly due to higher fleet management work. Accordingly, EBITDA margin dipped to 12.4% from 12.9% in 1Q14.

JVs & associates back to crisis level

Contribution from associates/JVs dropped to S$30.6m, of which JVs were S$16.3m (-40% yoy, -26% qoq) and associates were S$14.3m (-11% yoy, +1% qoq). We believe the plunge in JV performance was due to lesser repairs of Trent engines from its Rolls-Royce JV, Singapore Aero Engine Services. In the short term, as SIE is gearing up for Trent 900 (for A380), Trent 1,000 (for B787) and Trent XWP (for A350), it may see slower workload for maturing engines such as Trent 800 (for B777) and Trent 500 (for A340-500). Annualised contribution from JVs/associates could return to post-Global Financial Crisis level in FY10 (S$129m).

Toned down guidance

Management changed its guidance from “stable performance” in May 14 to a “more challenging outlook” with the decline in heavy checks and reduction in engine shop visits. Net cash was strong at S$581m but weakness in JVs/associates could affect dividend repatriated to SIE and dividend payout.

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