SIA Engineering (SIE SP) - UOB Kay Hian 2016-11-03: 2QFY17 Briefing Takeaways ~ Weak Operating Environment, No Respite In Sight

SIA Engineering (SIE SP) - UOB Kay Hian 2016-11-03: 2QFY17 Briefing Takeaways ~ Weak Operating Environment, No Respite In Sight SIA ENGINEERING CO LTD S59.SI

SIA Engineering (SIE SP) - 2QFY17 Briefing Takeaways ~ Weak Operating Environment, No Respite In Sight

  • SIAEC did not provide a clear reason for the lowered dividend but indicated that payout will range between 80-90%. We have thus reduced our FY17 core dividend estimate by 10%. In addition, losses at the repair and overhaul segment accelerated.
  • Going forward, we expect line maintenance segment to be the main profit driver.
  • Meanwhile, SIAEC’s greater reliance on JVs with OEMs highlights its weak bargaining power and we see no reason to stay invested. 
  • Maintain SELL with a lower target price of S$3.30.



WHAT’S NEW 


Takeaways from the analysts briefing are as follows:

  • SIAEC did not provide a clear reason as to why dividend was lowered aside from stating that it was consistent with the weak performance. When queried if the payout ratio would be reduced, SIAEC indicated that it would range from 80-90% (FY16: 89%). We have thus reduced our payout assumption from 89% to 80% and we cut our total dividend (excluding special) by 10% to 11.1 S cents, giving a core FY17 dividend yield of 3.0% (including special dividend: 5.4%).
  • The 9% decline in operating profit was due to: 
    1. higher losses at the repair and overhaul segment, and 
    2. lower profitability of line maintenance segment. 
  • Losses at the repair and overhaul segment rose 30% yoy, despite higher checks. Meanwhile, line maintenance profits fell 3% yoy as margins fell 1.3ppt. Going forward, we expect the line maintenance segment to be the main profit driver.
  • Margins impacted by a 3% increase in staff costs, highlighting SIAEC’s limited ability to pass on cost increases. SIAEC indicated that it was focusing on innovative technologies to improve productivity but that this was not expected to translate to lower staff costs in the near term. Still, SIAEC indicated there are measures in place to reduce costs in the event of a severe downturn. 
  • At the non-operating level, profits were dragged down by its Trent engine JV; we do not foresee any improvement over the next two quarters. While SIAEC’s Eagle Services associate profits improved, this was due to an unexpected increase in utilisation of Pratt & Whitney PW4000-powered B747s. The aircraft were deemed to be economical as jet fuel prices eased; however management does not expect this to be sustainable as the aircraft is increasingly being retired.


STOCK IMPACT


Earnings expected to decline over the next two years; we remain sellers. 

  • SIAEC’s JVs with Airbus and Boeing highlight its relatively weak bargaining position, as part of the existing MRO work will be shared with the two OEMs. 
  • The greater reliance on OEMs for airframe MRO and fleet management is a cause for concern rather than a reason to be optimistic, at least over the next two years. Until we see a greater quantum of thirdparty work, we see no reason to stay invested.


EARNINGS REVISION/RISK

  • We have lowered our FY17 and FY18 net profit estimates by 6% and 5% respectively, as we factor in higher staff costs.


VALUATION/RECOMMENDATION

  • Maintain SELL and we lower our target price to S$3.30 (from S$3.40), following our reduced earnings estimates. 
  • We continue to value SIAEC using DCF with WACC of 5.5% and terminal growth rate of 1.4%. 
  • Meanwhile, valuations remain rich at 27x FY17F PE. Our target price of S$3.30 implies a FY18F PE of 24x and dividend yield of 3.3%.


SHARE PRICE CATALYST

  • No immediate catalyst.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-03
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.30 Down 3.400




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