SIA Engineering - Better quarterly showing
- Strong JV contribution boosts core earnings in 3Q17.
- Core operating profit margin remains stable.
- High cash balance of c.S$560m, likelihood of special dividends at end of FY17.
Maintain HOLD as risk-reward looks fair at current price level.
- After a brief nose-dive, SIA Engineering’s (SIE) share price has recovered to just around our previous target price of S$3.53, and the stock is now trading in line with its historical average forward PE of about 25x.
- While fundamental weakness in the wide-body MRO (maintenance, repair and overhaul) space due to lower work content and longer intervals between checks on newer aircraft/engine models continues to cast a shadow on SIE’s future earnings projections, we think the possibility of a special dividend at the year-end (due to its large cash balance of c.S$560m, boosted by receipts from disposal of its stake in HAESL in 1QFY17) as well privatisation prospects by parent SIA should continue to provide some support to SIE’s share price.
3Q-FY17 core net profit higher than expected on strong JV contributions.
- Core net profit of S$50.3m for 3QFY17 was up c.41% q-o-q, boosted by a sharp jump in JV profits of about S$9.4m q-o-q.
- However, given that the engine repair and overhaul business, which accounts for the bulk of SIE’s JV takings, will continue to face structural issues, we think this quarter’s upswing is more a timing/recognition issue rather than an indicator of a sustainable recovery.
Expecting 12.5 Scts full-year dividend.
- We have raised our earnings forecasts for FY17 to account for better associate/JV profit in 3QFY17, but we are still skeptical about a sustained recovery in associate/JV contributions.
- We now expect a full year dividend of 12.5Scts (excluding special dividends) in FY17/18, roughly in line with SIE’s payout policy of 85-90% of core earnings.
- Rolling over our multiple pegs to FY18, our TP is adjusted up to S$3.58.
- Our TP is based on a blended valuation framework (PE, EV/EBITDA, dividend yield and DCF), and includes a 20% M&A/privatisation premium.
Key Risks to Our View
- We cannot rule out a lengthy period of weak MRO demand amid structural changes in the industry. Increasing competition could also lead to renewed stress on the margin front.
- Upside risk exists in the form of potential privatisation/M&A.