1QFY15 PATMI a miss

• 1QFY15 PATMI missed consensus
  
• Earnings uplift ahead from Clark base expansion
  
• Maintain HOLD
  

1QFY15 revenue in line but PATMI missed estimates

SIA Engineering Company’s (SIAEC) 1QFY15 revenue increased 1.6% YoY from S$289.4m to S$294.1m, forming 24.3% and 23.9% of our and consensus FY15 forecast respectively. Revenue growth was driven by fleet management segment, which was partially offset by reduction in airframe and component overhaul revenue as heavy checks were fewer than planned. However, lower operating margin and contributions from JV and associates resulted in 1QFY15 PATMI declining 22.3% to S$53.5m. 1QFY15 PATMI missed estimates as it only made up 18.9% and 19.0% of our and consensus FY15 forecast respectively. 1QFY15 operating profit decreased 25.3% to S$20.7m primarily due to higher subcontract costs (+33.3% to S$43.6m) though staff costs were lower (-8.6% to S$51.3m). Share of profits of JV and associates dropped 28.8% to S$30.6m, mainly due to a S$11.6m decrease in contribution from the engine repair and overhaul centers.

Moderate uplift in earnings ahead

Firstly, the commencement of operations at the third hangar of Clark base (Philippines) in Jun-14 will double the base’s capacity. We expect utilisation to be high and will start contributing to earnings for the rest of FY15 as it benefits from regional low cost carriers’ (LCC) capacity growth, whose shoestring budgets push them to opt for lower-cost sites such as Philippines. Secondly, the recently announced JV with Boeing to provide fleet management services to airlines is also expected to be a positive once it is approved and operational. By teaming up with Boeing, one of the two leading aircraft manufacturers, the JV can offer a full aftermarket menu as part of an aircraft purchase agreement, effectively locking in clients at an earlier stage.

Maintain HOLD

We think the trend of lower overhaul work will stay as regional airline capacity growth is primarily in the commoditised LCC segment. Consequently, we lower our FY15 growth forecast for contributions from JV and associates from 7% to 3%. We maintain HOLD but lower our FV from S$4.83 to S$4.71 based on 19.0x PER of 24.8 S-cents FY15F EPS (previous: 25.4 S-cents).

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.