SIA Engineering - CIMB Research 2016-07-26: Lumpy quarter, still hope for special dividend

SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Lumpy quarter, still hope for special dividend

1QFY3/17 core profit was in line with our forecast and consensus. Reported profit of S$198m included S$157m net restructuring gain from HAESL divestment.
SIE will see a pick-up in heavy checks for SQ’s B777 and A380 fleet in 2018-19. Meanwhile, FY17’s earnings growth will be backed by line and associates recovery.

Maintain Add and target price ($S4.16), still based on DCF. Catalysts include stronger-than- expected MRO recovery and corporate action by key shareholder.

SIE posted slightly lower 1QFY17 revenue of S$272m (-2% yoy, -7% qoq).
Line maintenance remained strong, supported by c.4.2% yoy growth in flights handled at Changi. This offset weaker fleet management from shrinking fleet size.
Recall that fleet management size dropped to 156 aircraft as at end-4QFY16 from 181 in 4QFY15. We believe airframe and components could see fewer qoq heavy checks during the quarter, substantiated by lower materials (-15% qoq) used.

EBITDA margin of 11.7% was comparable to 1QFY16 (11.3%) but lower than FY16’s average of 13.3%.
We believe this could be due to fewer heavy checks performed in 1QFY17. As such, airframe and maintenance could swing back to a minor loss from a S$3.3m profit in 2H16.
We believe this could be lumpy qoq, depending on maintenance schedule of the airlines. We are keeping our EBITDA margin forecast at 14.5%, expecting stronger subsequent quarters.

Associates and JV contributed c.50% of SIE’s PBT. Associates (mainly Eagle Services Asia) generated steady qoq profit of S$13.3m while JV (mainly SAESL) generated higher qoq profit of S$7.4m.
New generation engines may require lesser scope of work but we believe the low fuel prices are still keeping some of the older aircraft in use, which could provide a second wind for SIE’s associates and JVs.

SIE recognised S$178m EI, comprising a S$141.6m gain from the divestment of 10% in HAESL to Rolls Royce and HAECO as well as S$36.4m special dividend from HAESL following HAESL’s divestment of 20% stake in SAESL to Rolls Royce.
This was offset by S$21.3m provision for profit-linked component of staff bonus from the gain. Net cash was S$616m as of 1QFY17.
Based on SIE’s historical dividend payout, we believe the dividend payout could be as high as 135%, bringing the total DPS to S$0.24 (6% yield).

Our target price is still based on DCF (WACC: 6.4%). No change to our earnings forecasts and Add rating.
Downside risks include intensified competition from OEM to gain market share in MRO and a sharp decline in aviation sector.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-07-26

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