SIA Engineering - Maybank Kim Eng 2016-07-26: Large cash build-up from restructuring proceeds

SIA Engineering - Maybank Kim Eng 2016-07-26: Large cash build-up from restructuring proceeds SIA ENGINEERING CO LTD S59.SI 

SIA Engineering (SIE SP) - Large cash build-up from restructuring proceeds


Maintain HOLD; Support from likely special DPS

  • 1Q17 core net profit was in line. 
  • The company’s cash balance rose to an all-time high of SGD651m after receiving cash proceeds from the restructuring of its Rolls-Royce joint ventures. We see this as a prelude to a special DPS at its 1HFY17 interim results announcement in November. Our FY17 DPS of 23 cts includes 9 cts of special distribution. 
  • While FY17 earnings could remain depressed due to the challenging business outlook, we expect the prospects of a special payout to support its share price in the near term. 
  • Maintain HOLD with unchanged TP of SGD3.70, based on 20x FY3/18E EPS (0.25SD above 10-year mean).


1Q17 inline; Books one-off restructuring gain

  • 1Q17 core net income of SGD41.7m was inline. 
  • During the quarter, SIAEC booked a one-off gain of SGD178m relating to the restructuring of its Rolls-Royce joint ventures. This triggered an estimated SGD21.3m of staff cost provision for profitability-related KPIs. Excluding the impact of this provision, operating profit for the quarter would have been SGD19.7m. This compares with the headline operating loss of SGD1.6m.


Large cash build-up a prelude to special DPS

  • The company’s cash balance rose to an all-time high of SGD651m after receiving cash proceeds from the restructuring. 
  • While it could retain part of the proceeds for investment into new capabilities, we expect the majority of the gain to be distributed as a special dividend at its 1HFY17 interim results announcement in November. 
  • Our FY17 DPS of 23 cts includes 9 cts of special distribution.


Not expecting a strong rebound yet

  • We believe earnings could stay depressed amid the challenging operating environment. In particular, lower engine workload should continue to weigh on earnings of its associates and joint ventures. Management guidance remains muted.


Swing Factors


Upside

  • Bigger-than-expected workload for Rolls-Royce Trent engines.
  • Acceleration in aircraft deployment.
  • Increased use of older aircraft on improving economics from lower oil prices.

Downside

  • Rising labour costs.
  • Fleet renewal by airline customers that could reduce maintenance work.
  • Poorly-executed acquisitions.




Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-26
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 3.70 Same 3.70


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