SIA Engineering - CIMB Research 2016-02-01: Restructuring associates

SIA Engineering - CIMB Research 2016-02-01: Restructuring associates SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Restructuring associates 

  • 3Q16 reported profit of S$49m was in line with our forecast and above consensus, boosted by net restructuring gain of associates of S$6.8m. 
  • Core profit, however, was slightly below expectations as associates and JVs fell short of expectations. 9M16 core profit formed 70% of our full-year expectation. 
  • Maintain Hold with a lower target price, still based on DCF, with lower EPS for FY16- 18. Catalyst could be the potential special dividend from Rolls Royce’s restructuring. 

Core operations within expectations 

  • 3QFY3/16 revenue remained stable at S$275m (+3.7% yoy, +3.5% qoq) as the weaker airframe heavy MRO was offset by strength in line maintenance and fleet management. 
  • Changi flights handled during Oct-Dec remained resilient with 1.7% qoq growth in flights handled (Oct-Dec 15: 88,960 flights; Jul-Sep 15: 87,480 flights). 
  • EBITDA margin higher EBITDA margin for 3Q16 of 14.4% was above our expected 11%, mainly due to lower-than-expected total expenses. 
  • Materials and subcontractor’s costs (34% of total expenses) were lower as a function of lesser workload for heavy maintenance. 
  • There were also some savings of c.10% yoy on company accommodation and other operating expenses (amounting to 15% of total expenses). 
  • Staff costs stayed at 47% of expenses. 

Associates recovery lacklustre 

  • Share of profits from associates/JVs were boosted by S$13.6m restructuring gains, including profit from the sale of facilities. 
  • There were also S$6.8m liquidation and impairment losses in associates that were recorded at SIE’s company level. No details were provided on these corporate actions. 
  • Excluding EIs, associates/JVs were up 5% qoq to S$19.6m, a recovery that is below our expectation. 
  • We cut our EPS by 4-13% for FY16-18 to account for this. Hoping for special dividend Net cash stood at S$298m. 
  • The restructuring of Rolls Royce’s venture (refer to our report on 24 Nov 15) is ongoing and pending the approval of relevant national competition authorities. The exercise will result in a gain of c.S$187m. Assuming an 80% payout, this could translate into a special DPS of S$0.13. 
  • An interim DPS of S$0.06 has been paid. 

Maintain Hold 

  • Our target price is reduced to S$3.62 due to our earnings cut, still based on DCF valuations. 
  • SIE is trading at 20x CY17 P/E, or its 5-year average. 
  • Structural headwinds of deferrals in engine/aircraft heavy maintenance will limit the stock’s upside. However, special dividend potential and its net cash position may still retain relative interest in the stock vs. other sectors.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-02-01
CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.62 Down 4.02