SIA Engineering Company Ltd - Phillip Securities 2016-11-03: Not cleared for take-off

SIA Engineering Company Ltd - Phillip Securities 2016-11-03: Not cleared for take-off SIA ENGINEERING CO LTD S59.SI

SIA Engineering Company Ltd - Not cleared for take-off

  • S$264.8mn revenue missed our expectations of S$274.0mn by 3.4%.
  • S$35.5mn PATMI missed our expectations of S$38.4mn by 7.6%.
  • Interim dividend of 4.0 cents, lower than previous year's 6.0 cents.
  • Work content expected to be low, even when work volume picks up.


Restructuring of services and partnering with OEM 

  • The amalgamation of Rolls-Royce JVs Singapore Aero Engine Services Pte Ltd (SAESL) and International Engine Component Overhaul Pte Ltd (IECO) was completed on 2 October 2016. The intent of the amalgamation is to derive better efficiencies, scale and synergies.
  • Heavy Maintenance Singapore Services Pte Ltd (HMS Services) had received regulatory approval on 28 October 2016. The JV with Airbus combines SIA Engineering Company's (SIAEC's) maintenance experience with the technical expertise of the airframe original equipment manufacturer (OEM) to provide airframe maintenance, cabin upgrade and modification services for Airbus A380, A350 and A330 aircraft.


The operations of Pratt & Whitney (P&W) JVs 

  • Component Aerospace Singapore Pte Ltd (CAS) and International Aerospace Tubes-Asia Pte Ltd (IAT-A) will be integrated. 
  • The integrated entity is expected to generate better efficiencies, scale and synergies.


Lower interim dividend declared; lowered our full year forecast by 0.5 cent 

  • Interim dividend of 4.0 cents is 58.1% of 1H FY17 6.88 cents recurring EPS. This is lower than 1H FY16 interim dividend of 6.0 cents at 78.5% of 7.64 cents recurring EPS. 
  • We lowered our full year dividend assumption to 13.5 cents from 14.0 cents (due to lower revised net profit); our dividend payout assumption remains unchanged at 89%.
  • Management remains committed to keep payout to 80%~90%, as per historical.


Divestment gains not likely to translate fully to a special dividend 

  • While no firm decision has been made on the use of the S$178mn gain from divestment in 1Q FY17, Management has the intent to reinvest in technology and build up capabilities.
  • Going by past momentum and capital outlay for new ventures, we think that up to only half of the divestment gains would be paid out as special dividend, amounting to approximately 7.9 cents/share. We believe that Management would adopt a conservative approach and distribute any special dividend over more than one FY.


Maintain "Reduce" rating with lower target price of S$3.28 (previous: S$3.39) 

  • While work volume is expected to pick up in 2017, we believe work content will be lower compared to historical. This is due to better technology, which has led to better airframe and engine reliability. 
  • We have lowered our FY17/FY18 recurring PATMI by 5.1%/5.9%.




Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-11-03
Phillip Securities SGX Stock Analyst Report REDUCE Maintain REDUCE 3.28 Down 3.390




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