SIA Engineering - OCBC Investment 2016-07-27: Weak core earnings

SIA Engineering - OCBC Investment 2016-07-27: Weak core earnings SIA ENGINEERING CO LTD S59.SI 

SIA Engineering: Weak core earnings

  • Core 1QFY17 missed expectations.
  • One-off gain of S$178m.
  • Maintain HOLD on lower FV.

Recorded one-off staff costs provision of ~S$21.3m

  • SIA Engineering Company Ltd (SIAEC) recorded a 2.1% YoY decline in 1QFY17 revenue to S$271.6m due to drop in fleet management revenue but partially offset by higher revenue from line maintenance and airframe and component overhaul. 
  • 1QFY17 operating expenses increased 6.5% YoY to S$273.2m, but included in its staff costs was a one-off provision of ~S$21.3m for the estimated increase in profit- linked component of staff remuneration arising from the gain on divestment of its 10% stake in HAESL.
  • In addition, as a result of its divestment in HAESL, SIAEC also recorded S$141.6m in divestment gain and S$36.4m in special dividend from HAESL. However, 1QFY17 share of profits of associated and JV companies declined 13.8% YoY to S$20.7m, which believe was due to lower work content on engines. 
  • Stripping out one-off items, 1QFY17 core PATMI decreased 6.5% YoY to S$38.6m, and formed 21.5% of our FY17 forecast.

Expects special dividend from divestment gain but not all

  • In our view, we still expect MRO business to remain weak in the near to medium-term on longer check intervals of new aircraft and lower work content on newer/improved engines with increased reliability. 
  • Over the longer-term, we believe SIAEC’s collaboration with OEMs (e.g. Boeing, Rolls-Royce, Airbus etc.) will become one of the key growth drivers, mitigating heavy dependence on the maintenance, repair and overhaul business. 
  • With an overall gain less provision of ~S$156.7m arising from the divestment of HAESL, we expect SIAEC to declare special dividend in FY17. However, we also expect capex to increase over the next three years in order to build up capabilities for these new JVs/partnerships with the OEMs. Therefore, we assume only 50% of the S$156.7m will be declared as special dividend, on top of the assumed 90% payout ratio for its FY17F core PATMI.

Paring down our forecasts on weak outlook

  • On a weak set of 1QFY17 results, we also cut our FY17/FY18 core PATMI forecasts by 9.0%/5.6%. 
  • Consequently, our FV estimate decreases from S$3.70 to S$3.63. Maintain HOLD, supported by a FY17F dividend yield of 5.4%. 

Eugene Chua OCBC Securities | 2016-07-27
OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 3.63 Down 3.70