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
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http://www.maybank-ke.com.sg/
2015-11-24
Maybank Kim Eng
SGX Stock
Analyst Report
3.61
Down
3.75
