Thursday, 14 August 2014

SIA Engineering

Kim Eng on 14 Aug 2014

  • Reiterate SELL and TP of SGD4.20 (20x FY15 P/E).
  • SAESL’s weakness attributed to fewer shop visits for Trent 800 engines that power B777s.
  • Headwinds could persist due to loss of two aircraft and reduced utilisation of B777s by MAS; and improved reliability of Trent 700s that power A330s.
Weak SAESL attributed to Trent 800
During its recent results briefing, HAECO blamed the weakness at SAESL on fewer engine shop visits for the Trent 800 series of engines that power B777s. While better reliability of the Trent 700 that power the A330s was cited as the reason for lower shop visits at HAESL, management said "improved reliability and the change in engine profile of its customers" were behind SAESL’s poorer

Headwinds at Rolls-Royce engine shops could persist
While no specific customers were mentioned, we note that the two unfortunate incidents at Malaysia Airlines (MAS) (MH370 and MH17) involved B777s powered by Trent 800 engines. Even though the four engines lost in the two incidents accounted for less than 2% of the Trent engine fleet at SAESL's customers, these engines probably require higher maintenance work than newer models, in our view. The aircraft used on the two flights were almost 12 and 17 years old respectively. Furthermore, lower passenger traffic and ongoing restructuring at MAS are likely to affect utilisation for the rest of its B777s and lower its demand for maintenance work. Coupled with improved Trent 700 reliability, we believe headwinds at these Rolls-Royce engine shops could persist for some quarters. Reiterate SELL on SIAEC with an unchanged TP of SGD4.20, based on 20x FY3/15E P/E, equivalent to 1SD above its historical mean; justified by its positive long-term outlook.

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