Navigating through turbulence

  • 2QFY15 earnings disappoint, down 41% y-o-y
  • Affected by deferments/cancellations of heavy aircraft checks, extension of engine check intervals
  • Cut FY15/16F earnings by 23%/11% to factor in lower workload, margins
  • Dividend cut also likely in FY15; downgrade to FULLY VALUED with lower TP of S$3.80

Worst quarterly showing in a long time. 2QFY15 net profit of S$42.1m was down 41% y-o-y and 21% q-o-q. Revenue dropped by 3%, dragged down by lower heavy maintenance revenue. The weaker capacity utilisation resulted in poor operating margin of 5.6% (vs. 7.0% in 1QFY15 and an average of 9.8% achieved in FY14). Growth in fleet management revenue resulted in high subcontract costs as well. Share of profits from associates and JVs also dropped sharply to S$29m (- 36% y-o-y) as the engine MRO centres underperformed. We had highlighted the weakness at SIE’s engine centres earlier as older engine models are being retired on an accelerated

basis and newer models require less engine shop visits, thus lowering utilisation rates and profitability.

Challenges expected to persist in near term. Management indicated that operating environment continues to be challenging in the near term as airlines may continue to extend maintenance cycles for airframes and engines in consultation with OEMs and relevant regulatory authorities. While pent up demand will come back eventually and longer term fundamentals remain intact for the MRO industry, timing of recovery remains uncertain. Meanwhile, pressure on margins continues, with rising business costs and intense competition. SIE has recently entered into a proposed JV with Boeing (49:51) to provide fleet management services to Boeing customers in South Asia Pacific region. This and other collaborations with strategic OEM partners should drive long term growth prospects for SIE.

Lower yield prospects. We cut our FY14/15F earnings by 23%/11% to factor in the challenges described above. Likewise, we lower FY15 dividend expectation to 16Scts (vs. 25Scts in FY14), including the 6Scts interim dividend already announced. Hence, current valuations are unattractive with SIE trading at 26x PE and 3.6% yield. Hence, we downgrade the stock to Fully Valued with a lower TP of S$3.80 (details inside).

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