SIA Engineering - Maybank Kim Eng 2015-11-24: Unwinding the cross-holdings

SIA Engineering - Maybank Kim Eng 2015-11-24: Unwinding the cross-holdings SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Unwinding the cross-holdings 

  • Restructuring its engine JVs with Rolls-Royce and HAECO. Net proceeds could lead to special DPS. 
  • Expect competitive pressures with change in business model. 
  • Trim TP 4% to SGD3.61 on EPS adjustments. Stock may react positively to the prospect of a special DPS. Maintain HOLD. 

Restructuring its engine JVs 

  • SIA Engineering (SIAEC) announced the restructuring of its engine JVs with Rolls-Royce (RR) and HAECO. 
  • In essence, SIAEC is divesting its 10% stake in HAESL and a 2% effective stake in SAESL for SGD201.9m in cash. 
  • It will book a net gain of SGD186.8m for FY3/16. 
  • As part of this restructuring, RR has also replaced its geographic territory based work arrangement with a competitive model, where each engine shop competes for overhaul work. 
  • Despite the shift in business model, RR has committed to a predetermined amount of workload for SAESL from 2016 to 2030. 

Near term positive; longer term more competitive 

  • SIAEC could share part of the proceeds with shareholders. Assuming 50% of the proceeds are distributed, it may pay a special DPS of 9.0 SGD cts. 
  • Added to our forecasted core DPS of 14.5 SGD cts, FY3/16 payout could come to 23.5 SGD cts, a yield of 6.4%. 
  • While the stock may react positively to the near-term prospects of a special DPS, we see a slight negative from a more competitive business landscape. 
  • Under the old regime, all Trent engine maintenance work in the Asia Pacific region is dominated by SAESL and HAESL. 
  • In the new regime however, all authorized engine shops can compete to secure maintenance work globally. 
  • Nonetheless, we are not overly concerned as the maintenance of Trent engines remains a very niche service offering. We build in the divestment gain as an exceptional item for FY16 and cut our F17-18E EPS by 4% to remove contributions from HAESL. 
  • Our TP is lowered to SGD3.61 (from SGD3.75), based on an unchanged 20x FY3/17 EPS. 
  • Maintain HOLD.

Derrick Heng CFA Maybank Kim Eng | 2015-11-24
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.61 Down 3.75