SIA Engineering - Boosted by stronger associates and JVs
- SIE's 3QFY17 net profit of S$52.6m was slightly above our expectation and consensus, forming 30% of forecasts. 9M17 core net profit was in line at 75% of FY17F.
- Share of associates and JVs surprised on the upside as they contributed 60% of SIE’s net profit.
- We still expect SIE to declare special dividend in 4Q17 from the gain of HAESL divestment. Net cash stood at S$531m.
- We maintain our Hold call with an unchanged DCF-based TP of S$3.77. Re-rating catalysts could come from stronger-than-expected MRO volume.
- SIE’s 3QFY17 revenue of S$272m (+3% qoq, -1% yoy) was in line with our expectations.
- Lower fleet management (loss of Tiger Airways contract), airframe and component maintenance, repair and overhaul (MRO) were mitigated by higher line maintenance revenue.
- Changi’s flights handled in 3Q17 rose 2.1% qoq and 3.8% yoy to c.1,026 flights handled a day.
Cost helped by stronger US$
- SIE recorded S$4.8m of FX gains, bringing 3Q17 EBITDA margin slightly higher to 15% (1H17:14.2%).
- Staff costs of S$125m formed 46% of revenue, slightly higher than the average of 42% in the past four quarters.
Associates and JVs surprised
- Share of profit from associates went up 41% qoq and 10% yoy to S$17.3m. This could be due to more Pratt & Whitney engine visits by Pratt & Whitney.
- Share of profit from JVs also jumped by 192% qoq (-18% yoy) to S$14.3m, which could be due to resolution of supply chain issues with Rolls Royce which affected SAESL’s earnings in 2Q17.
Special dividend to sustain dividend yield of 5%
- The balance sheet is strong with net cash at S$530.5m. We remain hopeful of a special dividend in 4Q17.
- In 2Q17, management guided for 80-90% dividend payout on recurring earnings which translates into FY17 DPS of 12-13.5 Scts (interim DPS was 4 Scts). Assuming SIE distributes 50% of the HAESL c.S$160m gain, DPS could be increased by another 7 Scts, bringing total DPS to 19-20.5 Scts (5% yield). Capex is guided to be in the S$40m-70m p.a. range.
- Our EPS forecasts and DCF-based target price of S$3.77 (WACC: 6.4%) are intact.
- SIE is trading at 22x forward P/E, with flat earnings growth in FY18. We would be buyers if there was a visible recovery in MRO volume.
- Risk to call is longer-than-expected interval for aircraft MRO, which would drag revenue in FY18-19.