SIA Engineering - OCBC Investment 2015-11-04: Supported by stable dividend outlook

SIA Engineering - OCBC Investment 2015-11-04: Supported by stable dividend outlook SIA ENGINEERING CO LTD S59.SI 

SIA Engineering: Supported by stable dividend outlook 

 1HFY16 missed our expectations 
 Persistent structural headwinds 
 Revise valuation method to DDM 

2QFY16 helped by tight cost management 

  • SIA Engineering Company Ltd‟s (“SIAEC”) 2QFY16 revenue declined 6.7% YoY to S$266.0m on lower contributions from airframe and component overhaul services (ACS) as well as its fleet management programme (FMP) segments but offset by higher contribution from line maintenance (LM) segment. 
  • 2QFY16 share of profits from associated and JV companies decreased 35.7% YoY to S$18.7m as contributions from the engine repair and overhaul centres were 41.5% lower than the same period last year. However, as 2QFY16 operating expenses fell 11.3% YoY to S$239.0m on lower subcontract, staff and material costs, PATMI came in 5.7% YoY higher at S$44.5m. 
  • 1HFY16 missed our expectations as PATMI declined 10.3% YoY to S$85.8m, which formed only 44.5% of our FY16 forecasts. 

Weak industry-wide outlook to stay awhile 

  • ACS segment is likely to continue its decline due to lower work content and longer check intervals of new generation aircraft while the increased reliability of newer engines had been and will continue to impact its associated and JV companies. 
  • For LM, 1HFY16 revenue and operating profit grew 2.7% and 20.3% YoY, respectively, alongside Changi Airport's 2.5% growth in commercial aircraft traffic over the same period, while FMP revenue remained largely flat. 
  • While efforts on tight cost management and productivity improvement are bearing fruits, we think the decline in operating expenses and growth from LM segment are unlikely to fully offset the weak industry outlook. 
  • In our view, the structural headwinds for ACS segment is likely to stay for at least the next 12-18 months until these new generation aircraft/engines are due for workshop visits. 

Expects stable dividend payout ahead; maintain HOLD 

  • On weaker outlook, we cut our FY16/17F PATMI forecasts by 9.2/11.4%. Based on management guidance, we expect dividend payout ratio to remain at ~90% going forward. Hence, we revise our valuation method to DDM-based (prev: 20x FY16F P/E) to better reflect SIAEC's value over the longer-term and our FV increases from S$3.45 to S$3.85 (2% terminal growth; 6.4% cost of equity). 
  • Maintain HOLD. 

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-04
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOL 3.85 Same 3.45