SIA Engineering - DBS Research 2017-02-06: Better quarterly showing

SIA Engineering - DBS Vickers 2017-02-06: Better quarterly showing SIA ENGINEERING CO LTD S59.SI

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.


Valuation

  • 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.




Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-06
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 3.58 Up 3.53



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