SIA Engineering Company Ltd - Phillip Securities 2015-11-25: Restructuring of Rolls-Royce Joint Ventures

SIA Engineering Company Ltd - Phillip Securities 2015-11-25: Restructuring of Rolls-Royce Joint Ventures SIA ENGINEERING CO LTD S59.SI 

SIA Engineering Company Ltd: Restructuring of Rolls-Royce Joint Ventures

 SIAEC divests its 10% stake in HAESL.
 No change to SIAEC's direct stake in SAESL. 
 Termination of territory based rights leads to more open competition. 


What is the news? 

  • SIA Engineering Company Ltd (SIAEC) announced the divestment of its 10% stake in Hong Kong Aero Engine Services (HAESL) for S$163.8 mn. 
  • At the same time, HAESL will divest its 20% stake in Singapore Aero Engine Services Private Limited (SAESL). 
  • After the restructuring, SIAEC will own a 50% stake in SAESL, and no longer hold any stake in HAESL. Rolls-Royce and SIAEC intend to amalgamate the business and operations of SAESL and International Engine Component Overhaul Pte Ltd (IECO) into a single entity. 

 Termination of territory based rights of SAESL and HAESL. 

  • SAESL and HAESL operate out of Singapore and Hong Kong, respectively. Restructuring of the SAESL and HAESL JVs with Rolls-Royce will result in the termination of territory based rights for both entities. 
  • Both entities will be free to compete beyond the current designated Asia- Pacific territory for the global Trent engine aftermarket business. 

 One-off divestment gain for SIAEC and dividend. 

  • As of FY03/15 annual report, SIAEC's unquoted investment in HAESL stood at S$14.6 mn. We estimate divestment of SIAEC's 10% stake in HAESL will result in a net gain of S$149.2 mn. SIAEC will also receive a dividend of S$38.1 mn from HAESL. 

 Open competition is a double-edged sword. 

  • While the termination of territory based rights will allow SAESL to compete outside of its existing territory, but it also opens up competition from HAESL for SAESL's existing territory. 

 Special dividends possible, but unlikely. 

  • We note that SIAEC had stated that "the proceeds from these transactions will provide additional resources for the Company's investments". As such, we do not assume any special dividends to be paid out. 

Investment Actions 

  • We include the divestment gain into our financial model as an exceptional item and exclude all future dividends from SIAEC's stake in HAESL. 
  • As a result, core earnings are lower by about 3% to 4%. We have a new lower target price of S$3.35. (Previous: S$3.46), but upgrade SIAEC to "Neutral" rating, as the share price has corrected 9% downwards since our last report three weeks ago.


Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2015-11-25
Phillip Securities SGX Stock Analyst Report NEUTRAL Upgrad REDUCE 3.35 DOwn 3.46


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