SIA Engineering Company: Good margins, but muted FY08

We recently visited SIA Engineering Company (SIE) to get an insight on its
prospects. SIE recently reported its FY07 results and topline grew 1.9% to
S$977.4m with a star showing from its Fleet Management Program segment
which grew 65.8% to S$76.1m. However, operating profit dove 24.3% to
S$102m primarily due to a large bonus payout. Eventually, strong contributions
from its JVs (32.1% YoY increase to S$139.5m) enabled net profit to grow 5%
to S$242.1m. Net profit margins remained stable at 24.8%. SIE's new hangar
will only be available in early 2008 indicating muted organic MRO growth as
its current capacity is fully utilised. SIE is seeking longer term growth strategies
via international expansion to key booming markets like China and India to
capture the MRO work migrating from US and EU to Asia's lower cost centres.
We do not have a rating on SIE.

Flattish FY07 results. SIA Engineering Company (SIE) recently reported its
FY07 results with topline inching up 1.9% to S$977.4m, but operating profit
dove 24.3% YoY to S$102m primarily due to large bonus payout (pegged to
SIA) of S$29.1m, weaker US dollar and stock option expenses. However, net
profit grew 5% YoY to S$242.1m due to strong contributions from its share of
associated and JVs. Net profit margins remained stable at 24.8%.
Stifled organic growth for this year. SIE currently has a total of 8 hangars
with a capacity of 3.19m man hours/year. SIE has been operating at full capacity
with SIA's 100+ wide body planes (70% of SIE's work) and third party work for
the past few years. Recognising that organic growth comes from capacity
expansion, SIE is currently building Hangar 6 (compatible for A380) that will be
operational in early 2008 and has plans for more in the next 3-5 years. Until the
new hangars come online, organic growth is expected to be muted as current
capacity is fully utilised.
Growth likely from engine JVs. SIE's 19 JVs and associates increased their
contributions by 32.1% YoY to S$139.5m in FY07. Most of these JVs are with
engine manufacturers in order to acquire a slice of this lucrative yet protected
market where Rolls-Royce, General Electric and Pratt & Whitney are dominant
players. O&M Magazine has forecasted that the fastest growth segment in
worldwide MRO will come from the engine overhaul segment, growing from
US$13.5b in 2006 to US$19.2b in 2011.
Riding the Low Cost Carrier (LCC) wave. The advent of the LCC has brought
a new dimension into MRO services as LCCs outsource most of their support
services. SIE has managed to effectively tap this market, evidenced by its
Fleet Management Program's revenue (catering to LCCs) growth of 65.8% to
S$76.1m in FY07.
International growth strategies. SIE will likely grow faster than the forecasted
4.7% CAGR (2006-2011) growth in value of global MRO services to US$48.8b,
as we see a continued migration of MRO work from the US and EU to Asia's
lower cost centres. SIE is keen to start up MRO facilities in China and India to
get part of the pie while lowering costs in a labour intensive industry. We do not
have a rating on SIE.