SIA Engineering - OCBC Investment 2015-11-27: Rolls-Royce restructuring JVs

SIA Engineering - OCBC Investment 2015-11-27: Rolls-Royce restructuring JVs SIA ENGINEERING CO LTD S59.SI 

SIA Engineering: Rolls-Royce restructuring JVs 

 50% stake in SAESL unchanged 
 Net divestment gains of S$186.8m 
 Lower FV; maintain HOLD 

Changes in JV structures with Rolls-Royce 

  • SIA Engineering Company Ltd (SIAEC) announced the restructuring of JV structures that involve Rolls-Royce (RR), and Hong Kong Aero Engine Sercices (HAESL). The two key JVs for RR in Asia are Singapore Aero Engine Services (SAESL) and HAESL. 
  • Currently, SAESL is 50%, 30% and 20% owned by SIAEC, RR and HAESL, respectively, while HAESL is 45%, 45% and 10% owned by Hong Kong Aircraft Engineering Company (HAECO), RR and SIAEC, respectively. 
  • The restructuring will see SIAEC divest its 10% stake in HAESL to HAECO and RR in equal proportion while HAESL will sell its 20% stake in SAESL to RR. SIAEC and RR also intend to amalgamate operations and business of SAESL and International Engine Component Overhaul Pte Ltd (IECO) into a single entity. 
  • IECO, which overhauls and repairs aero engine components, is the second JV between SIAEC and RR in Singapore. 

Termination of territory based rights 

  • SIAEC is expected to record a net gain of S$186.6m in FY16, comprising 
    1. S$148.7m (less estimated transaction costs) from the divestment of its 10% stake in HAESL, and 
    2. a dividend of S$38.1m from HAESL after the sale of HAESL’s 20% stake in SAESL to RR. 
  • The restructuring of JVs with RR will also result in the termination of territory based rights of SAESL (operates out of Singapore) and HAESL (operates out of Hong Kong). This means that post-restructuring, both JVs will no longer be bounded by designated Asia-Pacific territory for Maintenance, Repair & Overhaul (MRO) business of Rolls-Royce Trent engines. 
  • In the near term, the removal of territory based rights may result in SAESL seeing increased competition from HAESL. However, over the longer-term, SAESL may benefit from its exposure to the even larger global Trent engine aftermarket business, but we think it is still too early to tell. 

Lower earnings outlook post-divestment 

  • We incorporate the one-off exceptional divestment gain, removed all future dividends from SIAEC’s 10% stake in HAESL, and forecast for a 20% payout of the divestment gain after taxation. 
  • Consequently, our DDM-based FV declines from S$3.85 to S$3.70. Maintain HOLD

Eugene Chua OCBC Securities | http://www.ocbcresearch.com/ 2015-11-27
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Down 3.85