SIAEC – Maybank Kim Eng

Wings clipped; Cut to SELL

  • Downgrade to SELL with a revised TP of SGD4.20, based on 20x FY3/15E P/E, as short-term outlook turns challenging.
  • Sinister signposts: A decline in heavy maintenance workload after recent expansion in the Philippines, and a persistent weakness in shop visits for its Rolls-Royce engine shops.
  • Management has turned bearish on its outlook.

 

Yet another disappointment

We see various challenging trends in this set of results. Revenue was little changed (+1.6% YoY) with higher fleet management sales offset by lower heavy maintenance workload. EBIT margin contracted to merely 7.0% (lowest since 1QFY3/10) as subcontract cost rose 4.5% YoY. Share of profits of associates and JVs fell 28.8% YoY to SGD30.6m due to a 37.8% fall in contribution from the engine repair and overhaul centres. Management turned bearish on its outlook, citing challenges from decline in heavy checks, reduction in engine shop visits and rising business costs.

Grounded by short-term headwinds

We see three headwinds to weigh down on FY3/15E earnings:

  • New hangar facilities in the Philippines (Hangar 2: Apr 2013, Hangar 3: under construction) are coming on-stream at a time when heavy maintenance workload is slowing down.
  • Persistent weakness in shop visits for its Rolls-Royce engine shops (FY3/14: 41% of net income).
  • The scale-back in capacity expansion by regional airlines looks set to reduce overall maintenance workload.

 

We therefore cut our FY3/15E-17E by 15-16%. In our view, valuation looks expensive against cyclical earnings contraction. Downgrade to SELL with a revised TP of SGD4.20 (from SGD5.75), based on 20x FY3/15E P/E (from 23x), equivalent to 1SD above its historical mean; justified by its positive long-term outlook.

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