SIA Engineering - DBS Research 2016-07-27: Cash balances boosted by divestment

SIA ENGINEERING CO LTD S59.SI

SIA Engineering - Cash balances boosted by divestment

1Q-FY17 core net profits of S$41.6m flat y-o-y.
JV/Associate profits depressed, likely due to weakness at engine shops.
Sale of HAESL stake boosts cash but visibility on magnitude of potential special dividend is low.

SIA Engineering reported bumper headline net profits of S$198.4m in 1Q-FY17, but this was skewed by S$178m in one-off gains and dividends from completion of the sale of its 10% stake in HAESL, partly offset by higher provisions for staff bonuses of S$21.3m arising from the divestment gains.
Stripping these out, core profit of S$41.6m would have been flat y-o-y, while revenues of S$271.6m for 1QFY17 were down 2% y-o-y due to a drop in fleet management revenue.

JV/Associate income was S$20.7m for 1QFY17, representing a 14% y-o-y decline, likely due to weakness at the engine shops.
As we had highlighted in earlier notes, the engine shops – which accounted for just over 50% of JV/Associate profits in FY15/16 – have been facing headwinds from lower work content and manhours required by newer engine types; this is a structural issue that is expected to persist.

The divestment of HAESL has resulted in a cash inflow of about S$200m for the company, boosting its cash balance to around S$650m currently. However, there is no certainty that this will result into a major special dividend at the end of FY17.
SIE’s organic growth potential remains low and amidst challenging industry conditions, there could be multiple uses of cash including investments in widening strategic partnerships with OEMs.
SIE is also likely to allocate more budgets towards developing capabilities in big data and predictive maintenance going forward; it recently undertook a S$50m R&D plan to focus on harnessing these technologies.
As of now, we have not included a special dividend in our forecast due to the uncertainty surrounding its magnitude.

Our core earnings are tweaked downward by 2% in both FY16/17 and FY17/18 to account for the weaker-than- expected numbers, especially from the associates/JVs resulting in an adjusted TP of S$3.81 based on a blended valuation framework (DCF, P/E peg, dividend yield).
Maintain HOLD as upside is limited at current prices. However, we think share price could continue to be supported by the possibility of special dividends as well as chances of privatisation by parent SIA.
Given the increased cash balance at SIE, SIA may need to effectively fork out less than S$300m to take SIE private if it so chooses.

Suvro SARKAR DBS Vickers | http://www.dbsvickers.com/ 2016-07-27

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