SIA Engineering - DBS Research 2016-05-12: Possibility of special dividends deferred

SIA Engineering - DBS Research 2016-05-12: Possibility of special dividends deferred SIA ENGINEERING CO LTD S59.SI 

SIA Engineering - Possibility of special dividends deferred 

  • 4QFY16 profits of S$41m flat y-o-y; in line
  • Heavy maintenance and engine MRO yet to pick up
  • Final dividend of 8Scts declared, bringing full-year payout to 14Scts – slightly below expectations



Downgrade to HOLD on valuation with TP of S$3.84. 

  • SIE’s share price has rallied ~10% since our upgrade in February and the stock now offers limited upside to our target price. 
  • Final dividend announced of 8Scts (bringing the full year payout to 14Scts) was disappointing, on the absence of a special payout from the sale of SIE’s 10% stake in HAECO; finalization of the sale has been pushed back to mid-2016. 
  • Valuations are now looking pricey with SIE trading at 23x forward P/E versus peers’ 18-19x. 
  • Fundamentals remain unchanged, with the heavy maintenance and engine JVs facing strong headwinds from lower work content and longer maintenance intervals.


4QFY16 results in line. 

  • 4QFY16 net profit of S$41.4m was flat y- o-y, while core net profit for the year was S$181m, also in line with last year’s numbers. 
  • Falling revenues at heavy maintenance shops and lower profits from JVs/associates (mainly engine shops) were offset by steady growth in line maintenance and fleet management as well as operational cost savings for the full year.


Lacklustre growth in FY17/18; long-term initiatives in the works. 

  • We expect topline growth of about 1-3% p.a. in FY17/18; we think there could be a slight cyclical upswing in MRO work in 2018/19 as the larger checks come due. However the secular trend of lower overall work content and longer check intervals remains an issue. 
  • JV initiatives with OEMs are a net positive, but any accretive impact is at least a few years away. 
  • Meanwhile, recent initiatives such as the S$50m investment into technologies such as big data for aircraft will help the group maintain its competitiveness in the long-term.


Valuation:

  • Our TP of S$3.84 is based on a blended valuation framework (PE, dividend yield and DCF), and includes a 10% M&A premium.


Key Risks to Our View:

  • We cannot rule out a lengthy period of weak MRO demand amid structural changes in the industry. 
  • Increasing competition could also lead to renewed stress on the margins front. 
  • Upside risk exists in the form of potential privatisation/M&A




Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-05-12
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 3.84 Same 3.84


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