Event
SIE’s 1QFY Mar12 results were generally within expectations but uninspiring. With the exception of a small gain on disposal of fixed assets, contributing to the general malaise were higher manpower and subcontracting costs and forex impact on associate and joint-venture contributions. Although global MRO activities should remain strong for the foreseeable future, hence sustaining SIE’s profitability, we believe the best time to sell the stock is when the aviation cycle has peaked rather than wait for things to go obviously bad. Maintain SELL.
Our View Net profit of $68m (-4% YoY) was bolstered by a $1.3m gain on disposal of fixed assets. Staff costs rose 3% YoY following the cessation of the Jobs Credit Scheme in mid-2010 and a tight labour market (only 20% of manpower on contract terms). Subcontract costs also remained high on a YoY basis, due to SIE’s FMP engagement with Gulf Air’s A330 fleet, for which it does not have the in-house resources.
Short-term problems that will continue include rising operating overheads such as manpower, while higher subcontracting costs related to its Middle Eastern expansion will weigh down margins. In addition, the weakening US$ is expected to affect SIE’s associates/JVs. Although the engine overhaul associates/JVs should benefit from increasing demand, almost all of their revenue is in US$.
Global MRO (maintenance, repair and overhaul) momentum is still strong due to catch-up activities, such as parked aircraft returning to service and requiring deferred maintenance. Also, 2011/12 is likely to see a rise in new aircraft delivered in previous years bunching together to need heavy maintenance. However, SIE’s share price is more closely linked to the aviation cycle, which has definitely peaked.
Action & Recommendation
The stock is trading at 17x FY Mar12 forecast EPS, midway through its peak cycle valuation. With global economic problems significant and worsening by the day, we maintain our SELL call and target price of $3.66 (15x PER).
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