SINGAPORE (July 26): UOB KayHian is keeping SIA Engineering at “sell” with $3.60 target price given 1Q earnings came in below expectations while cost control remains a challenge.
SIAEC also guided that recent initiatives and investments are unlikely to be accretive in the near term while valuations remain rich at 26x FY18F PE, above that of peers in the Maintenance, repair and operations (MRO) industry.
Consensus was expecting core earnings growth for FY18, however excluding the prior year’s extraordinary items (EI), SIA Engineering’s (SIAEC) core net profit declined 13% y-o-y in 1QFY18, says UOB in a Wednesday note.
At the operating level, staff costs would have risen by 6% y-o-y (ex prior year’s EI). This, along with higher D&A (depreciation & amortisation) and subcontract costs, led to an 8% decline in core operating profit.
At the non-operating level, associate and JV profits was bolstered by higher profits from Eagle Services Asia (ESA) resulting in a 1.9% rise in associate and JV income. However, this was unable to offset the decline at the operating level, leading to the 13% decline in core earnings.
Top-line was flat y-o-y, although UOB expects line maintenance revenue to increase during the period, in line with Changi Airport’s aircraft movements, which rose 3.5% y-o-y from Apr-May 17.
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If so, airframe and fleet management revenue would have declined y-o-y. Going by previous segmental operating margins, UOB reckons that the airframe and fleet management segment would have also been in the red for the period.
Shares of SIA Engineering are down 6 cents at $3.81.
