SIA Engineering - UOB Kay Hian 2016-05-11: 4QFY16 ~ Cautious Guidance And Relatively High Valuations

SIA Engineering - UOB Kay Hian 2016-05-11: 4QFY16: Cautious Guidance And Relatively High Valuations SIA ENGINEERING CO LTD S59.SI 

SIA Engineering (SIE SP) - 4QFY16: Cautious Guidance And Relatively High Valuations

  • 4QFY16 net profit was in line with consensus and our core net profit estimates. 
  • 4Q operating profit rose 19%, likely led by a reversal from losses to profits at the repair and overhaul segment. 
  • Meanwhile, SIAEC did not recognise the divestment gains from HAESL into P&L but recognised the amount in fair value reserves, and cut final dividend by 6% to 8 S cents. 
  • SIAEC continues to warn of the challenging MRO operating environment ahead and indicated that the recent JVs with OEMs may not be earnings accretive in the initial years. 
  • Maintain SELL. Target price: S$3.19.


RESULTS


• 4QFY16 net profit was in line. 

  • Net profit was 3% above our estimate and 2% below consensus implied 4Q estimates. 
  • SIAEC did not recognise the estimated S$142m gains from the divestment of an investment but the amount was recognised in fair value reserves. 
  • Operating profit growth was likely due to a reversal from losses to profit at the repair and overhaul segment, resulting in a S$8.8m difference in 2HFY16 repair and overhaul operating profits vs 2HFY15’s. 
  • Meanwhile, line maintenance profit was flat in 2HFY16 despite a 5.4% rise in line maintenance revenue. 
  • In 4QFY16, 25% of the incremental revenue flowed through to the operating level. 
  • Still, operating profit growth was below expectations, primarily due to a sharp 29% rise in material costs. 
  • 4Q net profit also included an exchange loss of S$8.2m, likely due to the stronger Singapore dollar.

• Cuts final dividend by 6% to 8.0 S cents from 8.5 S cents. 

  • Payout ratio for the full year amounted to 89%, 0.4ppt higher than the previous year. 
  • Meanwhile, operating cash flow (OCF) excluding working capital changes and FCF rose 41% and 97% respectively in FY16.


STOCK IMPACT


• Cautious guidance echoes our concerns over the past quarters. 

  • SIAEC has indicated that “the operating environment for the MRO industry remains challenging” going forward, especially as airlines replace their older fleets with the new-generation Airbus A350 and Boeing 787. 
  • SIAEC also mentioned that the recent JVs with OEMs, while strategically important for long-term growth, would likely not be earnings accretive in the near term.

• Key information/answers we would be looking out for at the analyst briefing. 

  • We would be looking out for: 
    1. the extent of volume of line maintenance checks, and 
    2. the extent of third-party MRO work. 
  • In addition, we also intend to seek clarity on the expected timeline for the JVs with Boeing and Airbus to contribute to earnings.

• Rich valuations. 

  • PE valuations remain elevated at 23x FY17 earnings, despite the continuous cautious guidance by the company. This is significant higher than SIAEC’s long-term average PE multiple of 16.6x and MRO peer average of 18.6x. 
  • We believe that the steep premium to peers is unwarranted, given its loss of competitive positioning as the sole Centre of Excellence for Trent engine MRO in Asia Pacific, and hangar overcapacity in the region.


EARNINGS REVISION/RISK

  • No change to our earnings estimates.


VALUATION/RECOMMENDATION

  • Maintain SELL with unchanged target price of S$3.19. 
  • We continue to value SIAEC using capitalised FCF with unchanged WACC and long-term growth rate of 6.2% and 1.2% respectively. 
  • At current levels, we would recommend a switch into STE (STE SP/BUY/$$3.60), which trades at 18.6x forward PE, 20.5% lower than SIAEC’s PE valuations.


SHARE PRICE CATALYST

  • No immediate catalyst.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-11
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 3.19 Same 3.19


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