SIA Engineering Company

[kayhian]

Source: OCBC MarketPulse

SIA Engineering: 1QFY15 PATMI a miss

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. 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. Uplift in earnings ahead will come from: 1) commencement of operations at the third hangar of Clark base (Philippines) in Jun-14, and 2) the recently announced JV with Boeing to provide fleet management services to airlines once it is approved and operational. We think the trend of lower overhaul work will stay as regional airline capacity growth is primarily in the commoditised LCC segment. We maintain HOLD but lower our FV from S$4.83 to S$4.71. (Yap Kim Leng)

[csl123]

Source: OCBC MarketPulse

SIA Engineering: 1QFY15 PATMI a miss

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. 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. Uplift in earnings ahead will come from: 1) commencement of operations at the third hangar of Clark base (Philippines) in Jun-14, and 2) the recently announced JV with Boeing to provide fleet management services to airlines once it is approved and operational. We think the trend of lower overhaul work will stay as regional airline capacity growth is primarily in the commoditised LCC segment. We maintain HOLD but lower our FV from S$4.83 to S$4.71. (Yap Kim Leng)

Just some thoughts,
1) For heavy maintenance work, the strategy is to use SIA's fleet as the base load, excess capacity will be filled by 3rd party customers. If the company could not fill the additional slots in Singapore, how can it be expected to fill the slots in Clark Airbase? There must be something more fundamental (high cost, poor turnaround time) troubling the business.

2) The fleet management business has been declining quite drastically over the years. (source : SIAEC AR 2013/14 and 2012/13) I see that the JV with Boeing is more of an opportunity to divest the business by novating existing customers to the JV. Given the above facts, I expect revenue to decline with or without the JV.

3) Excess cash in the bank. The company has more than 600M in cash. With revenue at 1B, the company does not need so much cash for working capital. This could possibly mean that a) The Company has invested too little in CAPEX, infrastructure and equipment b) There is risk adversity due to most of the senior management retiring or reaching retirement c) Lack of business development effort on the Company to scout for good partnership and acquisition opportunity, as there were no JV announcement for a long period.

I will recommend a SELL rather than HOLD.

[greengiraffe]

http://www.businesstimes.com.sg/companie...ompetition

SIA Engg hit by rising costs, competition
By
Nisha Ramchandaninishar@sph.com.sg@Nisha_BT
5 Nov5:50 AM
Singapore

SIA Engineering Company (SIAEC) reported a near 41 per cent year-on-year slump in net profit to S$42.1 million for the second quarter ended Sept 30, partly due to declining share of profits from associated and joint venture companies.

Revenue was lower for the three

[Contrarian]

The company strategy of being a hub and being efficient, is now challenged by

1. A strong SGD and higher labour costs

2. Regional competition chasing its tails

3. The OEMs going into servicing business.

Glad I sold out earlier in the year...

http://www.businesstimes.com.sg/companie...ompetition

SIA Engg hit by rising costs, competition
By
Nisha Ramchandaninishar@sph.com.sg@Nisha_BT
5 Nov5:50 AM
Singapore

SIA Engineering Company (SIAEC) reported a near 41 per cent year-on-year slump in net profit to S$42.1 million for the second quarter ended Sept 30, partly due to declining share of profits from associated and joint venture companies.

Revenue was lower for the three

[csl123]

Source: OCBC MarketPulse

SIA Engineering: 1QFY15 PATMI a miss

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. 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. Uplift in earnings ahead will come from: 1) commencement of operations at the third hangar of Clark base (Philippines) in Jun-14, and 2) the recently announced JV with Boeing to provide fleet management services to airlines once it is approved and operational. We think the trend of lower overhaul work will stay as regional airline capacity growth is primarily in the commoditised LCC segment. We maintain HOLD but lower our FV from S$4.83 to S$4.71. (Yap Kim Leng)

Just some thoughts,
1) For heavy maintenance work, the strategy is to use SIA's fleet as the base load, excess capacity will be filled by 3rd party customers. If the company could not fill the additional slots in Singapore, how can it be expected to fill the slots in Clark Airbase? There must be something more fundamental (high cost, poor turnaround time) troubling the business.

2) The fleet management business has been declining quite drastically over the years. (source : SIAEC AR 2013/14 and 2012/13) I see that the JV with Boeing is more of an opportunity to divest the business by novating existing customers to the JV. Given the above facts, I expect revenue to decline with or without the JV.

3) Excess cash in the bank. The company has more than 600M in cash. With revenue at 1B, the company does not need so much cash for working capital. This could possibly mean that a) The Company has invested too little in CAPEX, infrastructure and equipment b) There is risk adversity due to most of the senior management retiring or reaching retirement c) Lack of business development effort on the Company to scout for good partnership and acquisition opportunity, as there were no JV announcement for a long period.

I will recommend a SELL rather than HOLD.

I maintain the above narrative as it is being reinforced by the latest results.

[AlphaQuant]

Quite a good writeup from JP on SIAEC's brief.

**************

■ Lower engine shop visits will likely persist in 2HFY15 due to the escalation of overhaul intervals for Rolls-Royce Trent engines but the required repair works are expected to return by 2016:
The improved reliability of Trent engines has driven the extension of intervals between each engine overhaul and hurt SIA Engineering’s JVs, SAESL and IECO’s engine overhaul volume and their share of profits fell c.30% y/y in 2QFY15.

However, management expects demand to return over time with a greater scope of repair work in the subsequent shop visits. Meanwhile, associates’ profits fell 45% y/y in 2QFY15, mainly driven by Eagle Services Asia (which is SIE’s tie-up with Pratt & Whitney) as some of the engine types it services are progressively being phased out. Singapore Airlines’ decommissioning of its five A340-500s and parking of freighters also resulted in the reduced workload.

■ Last minute deferral and cancellation of heavy maintenance checks pushed Repair & Component Overhaul business segment into loss in 1HFY15:
SIA Engineering did only 10 “D” checks in 1HFY15 versus 23 in 1HFY14 (down 57% y/y). Two of these were last minute cancellations while the remainder were largely delayed or substituted with the overhaul of smaller, lower-yielding aircraft. The number of “C” checks fell 8% y/y to 34 from 37 while the number of “A” checks (done at the hangar or line) was fairly stable at 192 versus 193 in 1HFY14. This resulted in a 9.1% y/y decline in Airframe & Component Overhaul revenue in 1HFY15 which more than offset the 21.9% y/y improvement in Fleet Management revenue. Consequently, Repair & Overhaul revenue fell 2.5% y/y and incurred an operating loss of S$7.4MM (op loss margin 2.1%) in 1HFY15 versus S$15.1MM profit (op profit margin 4.1%) in 1HFY14.

■ Fleet Management business continues to grow:
Revenue from Fleet Management rose 21.9% y/y in 1HFY15. At the end of 1HFY15, SIA Engineering had 170 aircraft (including 118 A320s, 29 A330-300s, 6 B737s, 12 B747s, 5 B777s) in its FMP programme, up 8% y/y but unchanged h/h as at 1HFY15. 8 new contracts were signed and the airline customers include AirAsiaX, (for ten A330s), Asiana Airlines, Dubai Air Wings, Scoot, Nok Air, LAN.

■ Line Maintenance profitability improved:
SIA Engineering handled 67,090 flights in 1HFY15, up 2.3% y/y which was better than expected considering that Singapore Changi Airport’s aircraft movements fell 1% y/y during the same period. Line Maintenance (LM) revenue also rose 2.3% y/y, implying that average rates were largely stable in 1HFY15. LM operating profit rose 7.1% y/y to S$44.0MM (op profit margin 20.0%) in 1HFY15 from S$41.1MM (op profit margin 19.0%) in 1HFY14.

■ SIA Engineering’s 49%:51% fleet management joint venture with Boeing to provide service offerings for Boeing 737, 747, 777 and 787 aircraft is pending regulatory approval in various jurisdictions and on track to be established in early 2015. Start-up losses are expected in the initial years but management sees strong growth potential as the tie-up with Boeing will help provide access to a larger pool of customers, mainly in the South and Southeast Asia and Australia/New Zealand regions and help drive growth.

■ Management has launched various initiatives to manage this period of reduced workload:
1) Increase sales team’s efforts to secure more airline customers and contracts.

2) Drive yield improvements by enhancing service offering.

3) Improve turnaround time of aircraft maintenance jobs.

4) Improve staff productivity and increase their capability and flexibility to work in different divisions, depending on market demand.

5) Reduce excess staff by sending them for training, offering no-pay leave and voluntary early retirement schemes. SIA Engineering’s staff costs fell 7% y/y and 6% q/q in 2QFY15.

[hongonn]

Quite a good writeup from JP on SIAEC's brief.

JP = JP Morgan? I must say this report carries much substances than local broker houses one.

I was trying to find out the details and explanation of their bad result and any action taken by management to remedy the increased costs. But many times local broker houses just extracting sentences from the result announcement and use very high level general wording.

So far i am more concern about their engine service sector. I am not sure the engine servicing is temporary push back and the volume will be back eventually, or a fundamental change that engine need not service frequently? And certain engine phase out will result in permanent slump?

I also notice that SIA Engr only services 2 of the 3 biggest engines. How about GE? They do it all by themselves?

[csl123]

Quite a good writeup from JP on SIAEC's brief.

JP = JP Morgan? I must say this report carries much substances than local broker houses one.

I was trying to find out the details and explanation of their bad result and any action taken by management to remedy the increased costs. But many times local broker houses just extracting sentences from the result announcement and use very high level general wording.

So far i am more concern about their engine service sector. I am not sure the engine servicing is temporary push back and the volume will be back eventually, or a fundamental change that engine need not service frequently? And certain engine phase out will result in permanent slump?

I also notice that SIA Engr only services 2 of the 3 biggest engines. How about GE? They do it all by themselves?

Two points about engine overhaul JVs for SIAEC (ESA and SAESL)

Firstly, there is a fundamental change in the way engines are being designed and maintained. Fixed price packages/power by the hour arrangements are being employed to reduce the operating cost of the airlines. There are more incentives to keep the engine on the wing of the aircraft, rather than sending them to shops for overhaul. The newer generation engines (XWB, Trent1000, LEAP and PW1100) more "on-wing" friendly.

Secondly, ESA services mainly the legacy P&W engines, which includes PW4000 on the B747. There is an overhype about the overhaul capability for PW1100 for the A320NEO. There will be limited demand for the overhaul for these engines as:
1) Only Tiger Air is going for A320NEO for replacement. Silkair has chosen the B737NG or MAX, which is on the CFM56 or sole source LEAP-1B respectively.
2) Even assuming ESA is going to overhaul PW1100, there won't be any likely overhaul requirements 7-10 yrs after introduction of the PW1100.
It will be past 2020 before any business comes in. By then, ESA will likely be in serious trouble.

<< Conclusions:
1) ESA and SAESL will require a change in business structure from an overhaul shop to providing on-wing support in order to stay relevant in the market.
2) A JV with GE/CFM is inevitable to stay competitive. GE and CFM have cornered 70-75% of the engines for the narrow-body market. It will be the sole source engine provider for B777X, a potential replacement for some of the B777 aircraft in SIA's fleet. >>


FYI: GE appoints ESA as an authorised repair centre for GE90 engines.
http://www.pwsingapore.com.sg/index.php%...temid%3D59

[specuvestor]

^^ Nice analysis I got to ask my friend who works in the aircraft engine industry on how it works

Do you think SIA and Tiger woes is overflowing into SIAEC?

[hongonn]

Thanks csl123, still have some enquiries

I supposed the engine check is enforced by the regulation authority and it shouldn't subject to what model or what technology that your engine used. After certain flight hours it will still required to be checked, enforced by the rule? In this case airlines are the ones to approach regulators asking for check extension, not because regulator has changed the flight hours?

I also wonder what is exact technology invented to give engines less maintenance? Hehe based on my car experience, in fact the engine parts are made smaller, cheaper and shorter life span, and easily replaceable. I thought manufacturers are more focus on engine fuel efficient than maintenance.

On-wing friendly you mean instead of sending the engine to workshop, now they can overhaul the engine on the wing? Are they still performing the same check and any impact to the price? Less labour cost for dismantle the engine from the wing?