A year of famine

SIE’s 2Q15 net profit of S$42m was below our expectations (S$60m) and consensus (S$68m) due to the weak contribution from JVs and associates that formed 62% of pretax profit. 1H15 net formed 40% of our FY15 forecast. Better engine reliability caused a reduction in engine visits required by its JVs and associates. The maintenance programme is likely to be delayed until CY16, when we expect it to restart with a vengeance. Airframe heavy checks plunged because of similar reasons and cancellations. The only positive is the interim DPS of 6 Scts. We cut FY15-17 EPS by 11-14% for lower contribution from JVs/associates. Accordingly, our target price is lowered to S$4.00, still based on blended P/E and DCF. Maintain Reduce. Weak qoq earnings and margin pressure could be the key de-rating catalyst.

If it ain’t broke, don’t fix it

We believe that SIE is being squeezed by struggling original equipment manufacturers (OEMs). 2Q15 JV contribution was down 30% yoy to S$18.5m, while associates’ contribution fell 52% yoy to S$10.6m. Its main JV, SAEL, which services Rolls-Royce Trent engines saw a 30% reduction in engine repairs, as the newer engines are more reliable. This translates into longer intervals between overhauls, with certain modules being delayed by up to two years. SIE’s associate, Eagle Services, was also negatively affected by lower repairs for the long-suffering Pratt & Whitney, which has been struggling to defend its engine market share.

Airframe division incurred operating loss for the first time

Airframe maintenance revenue dipped 9% yoy from S288m in 1H14 to S$262m in 1H15. Similar to the engine segment, several customers delayed their heavy check maintenance. Only 10 “D” checks were performed in 1H15 versus 24 checks in 1H14. Certain contracts were also cancelled without penalty (for goodwill). High fixed labour costs (50% of airframe costs) resulted in the division posting its first operating loss of S$7.4m in 1H15. Despite the unimpressive Changi airport data, Line Maintenance revenue was stable at S$221m in 1H15, thanks to more light checks during line maintenance.

One-year famine, at the very least

SIE is facing structural issues, with internal pressure (high labour costs) and external (customers delaying maintenance to cut costs). We believe that the stock is unlikely to outperform the market in the next 12 months.

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