SIA Engineering - DBS Research 2016-02-02: Time for a re-look

SIA Engineering - DBS Research 2016-02-02: Time for a re-look SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Time for a re-look 

 3Q-FY16 results inspire some confidence 
 Worst could be over for earnings 
 Possibility of special dividends exists 
Upgrade to BUY, TP S$3.84 


3QFY16 results provide some relief. 

  • Headline net profit came in slightly above our expectations at S$49.4m (+ 7% y-o-y; +11% q-o-q). 
  • Two things stood out – core operating margins continued on a recovery trend to 10.5% and engine MRO centres registered sizeable rebound in profitability after some relatively weak quarters. 

Outlook not the best but worst could be over. 

  • SIE’s heavy maintenance segment has been grappling with longer intervals between maintenance cycles of new planes, and engine shops’ performance has also been soft as some older engine models are phased out. 
  • However, new capabilities have been built and maintenance requirements will eventually catch up over a 2-3 year timeframe. 
  • Given that we are already about 7 quarters into a downcycle, a recovery can’t be that far off. 

Limited growth in FY16/17, but there is potential for special dividends. 

  • We are not expecting strong earnings growth in FY15-17 but the fleet management JV with Boeing is up and running and will drive growth in the longer term. 
  • SIAEC has also recently restructured its shareholdings in engine MRO JVs with Rolls Royce, which will result in one-off disposal gain of S$186.8m (reflected in our FY16 forecast) once completed. This could result in special dividends either in FY16 or FY17. 

Valuation: 

  • Given the possibility of sequential earnings recovery, special dividends, and potential M&A activity, we upgrade our call to BUY. 
  • The stock is down around 15% since its recent peak last November and provides a better entry point. 
  • Our TP of S$3.84 is based on a blended valuation framework (PE, dividend yield and DCF), and includes a 10% M&A candidate premium. 

Key Risks to Our View: 

  • Further earnings downside. While we reckon the worst could be over on the earnings front, we cannot rule out a lengthy period of slow MRO demand amid structural changes in the industry. 
  • Increasing competition in the region could also lead to renewed stress on the margins front.



Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-02-02
DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 3.84 Same 3.84


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