SIA Engineering - CIMB Research 2016-05-11: Better half, with hope of super dividend

SIA Engineering - CIMB Research 2016-05-11: Better half, with hope of super dividend SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Better half, with hope of super dividend

  • FY3/16 net profit of S$176.6m (US$129m) was in line at 97% of our estimate.
  • 2H16 offered glimpse of turnaround, as repair & overhaul achieved operating profit 18 months of losses. Line maintenance operating profit was steady hoh.
  • A final DPS of S$0.08 was declared, bringing FY16 DPS to S$0.14 (FY15:S$0.145). Payout remains at 89%. Likely special dividend in FY17, given HAESL divestment.
  • We raise EPS by 6% in FY18 to account for higher sales and margin. Our target price is lifted to S$4.16, still based on DCF.
  • We believe that the worst is over for SIE and expect gradual earnings recovery for repairs and steady line maintenance earnings in FY17. Upgrade from Hold to Add.

More heavy checks in 2H16, line maintenance in line with Changi

  • 2H16 revenue of S$569m (US$415m) rose 5% hoh, with growth in all three segments- airframe & components (+6% hoh), fleet management (+9% hoh,) and line maintenance (+2% hoh). 
  • Revenue growth for airframe components (41% of 2H16 revenue) came from more D checks and A380 C checks (equivalent to D checks) in 2H16. 
  • Line maintenance revenue (41% of 2H16 revenue) reflected the busier volumes in Changi.

Better operating leverage

  • We believe SIE’s efforts to control costs are paying off, as operating leverage improved. 
  • Despite a forex loss of S$12m (US$9m), EBITDA margin expanded from 11.8% in FY15 to 13.4% in FY16. 
  • Operating expenses fell 3% yoy compared to the 1% drop in revenue due to lower staff costs (-3% yoy) and subcontractor costs (-10% yoy). 
  • Management attributed this to shift in workflow and workshop headcount reduction. Excluding forex, FY16 EBITDA margin would have been 14.4%.

Signs of recovery in aircraft components division

  • On the back of higher number of checks and lower costs, the aircraft component division turned in operating profit of S$3.3m (US$2.4m) in 2H16 (operating margin of 1%) after operating losses in 1H15-1H16 due to longer maintenance intervals. 
  • We expect SIE to see pick-up in D checks from 1H18, dominated by SQ B777s (c.50% of its total fleet) and A380s as these checks were last carried out in 2013. 
  • Margin recovery is likely moving forward, as the division used to deliver c.5% operating margin.

Associates troughed, low oil prices may keep old engines

  • 4Q16 contribution from associates and JV was down 7% qoq and 14% yoy to S$18.3m (US$13m) as a result of lower engine visits for SAESL (Rolls Royce engines). 
  • Given the prolonged low oil prices, some airlines are extending the useful lives of their B747 fleet (powered by PW4000 engines). This could result in a steady rise in engine visits.

Upgrade from Hold to Add

  • Given SIE’s solid net cash position of S$385m (US$281m) and potential gain of c.S$187m (US$136m) from HAESL divestment (by May 16), we estimate special DPS of S$0.13 (payout of 80%), bringing FY17 DPS to S$0.27-0.29. 
  • We think FY16 could be the worst year for SIE in a decade, as it combatted structural headwinds from new generation aircraft and loss of market share to OEMs. 
  • Going forward, steady line maintenance earnings and returning of heavy checks are catalysts for earnings growth.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-05-12
CIMB Securities SGX Stock Analyst Report ADD Upgrade HOLD 4.16 Up 3.62